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Learning investing lingo can be difficult. Even getting started with the basics can be confusing as there are many companies competing for our investment dollars.
A few days ago, I asked my youngest son if he knew what a brokerage firm was. He’s the smart one in the family but having never invested in the stock market (as a college student), he wasn’t sure exactly whether a broker was a person or a place. (The term refers to both a person who recommends and sells stocks AND a brick-and-mortar company that executes orders for clients online, in person, or over the phone).
It got me thinking that people often invest in the stock market in ways that don’t involve dealing with a brokerage firm.
There are many places that play a role in enabling people to invest. Here are five places that come to mind:
Generally, I can buy any stock available on the New York Stock Exchange (NYSE) and NASDAQ Stock Exchange through a discount brokerage firm, such as E*Trade, Fidelity, Schwab, and TD Ameritrade. Typically, I can also buy mutual funds and ETFs that contain stocks as well as penny stocks available through the Over-the-Counter Bulletin Board (OTCBB).
Traditional, full-service (and higher-priced) brokerage firms, such as Merrill (owned by Bank of America) and Morgan Stanley, are still around. But they tend to promote financial advisory and wealth management services rather than the simple execution of stock purchase and sell orders.
Designed to serve: the investor who’d like to build and manage an investment portfolio on her own.
I have had employers who offered a 401(k) plan that allowed me to invest in the stock market. Such a retirement plan allows me to contribute to my own individual account within the plan and possibly receive matching contributions from the employer. My investment choices may include company stock, index funds, and target date funds.
In addition, an employer may offer company stock through employee stock purchase plans (ESPPs, which may allow employees to purchase stock at a discounted price), employee stock ownership plans (ESOPs, which allow companies to give stock to employees), or other programs.
Designed to serve: employees who want to invest in mutual funds for retirement and accumulate company stock
Investment advisory firm
There are two main types of investment advisory firms: robo advisors that use algorithms to develop client portfolios; and private advisors, who construct custom portfolios for clients. Check to be sure that a firm is an SEC-registered investment advisor.
I can invest in exchange-traded funds (ETFs) through robo advisors and managed portfolio providers, such as Betterment and FutureAdvisor. Such firms may have a sister company or partner that offers brokerage services for the investment advisory arm. For example, Betterment Securities provides brokerage services to Betterment LLC clients and FutureAdvisor handles transactions through client accounts at Fidelity Investments and TD Ameritrade.
Private advisors may invest money in ETFs but may also buy and sell individual stocks and mutual funds on my behalf. Like FutureAdvisor, they may manage my portfolio but my money could be held by a discount brokerage firm like TD Ameritrade.
Designed to serve: those who want to outsource investing decisions and don’t mind paying fees for investment advisory services
See my managed portfolio and robo advisors comparison to learn more about this investment method.
Mutual fund company
Many mutual fund companies sell mutual funds directly to investors. These funds often contain baskets of stocks, including those associated with a certain market index or those selected according to a specific criteria.
I don’t have to open a brokerage account to buy these funds. However, I may be able to buy certain funds through an account with a brokerage firm. In some cases, buying directly from the fund company can save administrative and transaction fees.
Designed to serve: clients who want to invest with a specific mutual fund company
A company affiliated with my bank may offer brokerage services or investment advisory services. For example, WellsTrade (associated with Wells Fargo) offers brokerage products and services through Wells Fargo Advisors. BB&T enables its customers to buy stocks and other investments through BB&T Investment Services, Inc.
Many affiliated firms focus on investment advisory services. Clients are paired with a financial advisor who provides guidance on the selection and purchase of stock and other types of securities. For example, Chase bank customers can buy securities (such as stocks, mutual funds, and ETFs) through JPMorgan Securities but investment selections and securities transactions are orchestrated by financial advisors.
Designed to serve: customers who want to link banking with investing and don’t mind paying (generally) higher fees for self-directed investing and investment advisory services
There are many ways to get started in investing. In fact, someone who considers herself a non-investor may already be investing in the stock market through an employer’s retirement and/or profit-sharing plans, even if she (or he) doesn’t have a brokerage account. She may have started investing through a robo-advisor because of its simplicity. Or she may have been referred by her banker to an affiliated investment firm. All these places offer valid ways to invest in the stock market.
Does your investment firm’s services mesh with your investment style?