Types of Accounts: Taxable

Now that we have established how to choose a brokerage firm, let’s take a look at the different types of accounts most brokerage firm’s offer, and which one is a better fit for you and your investment objectives.

• Taxable Accounts: these types of accounts are typically individual or joint accounts, but can also include custodial, trust, and estate accounts. They are labeled “taxable accounts” because any gains earned in the account are subject to a federal tax. Any interest earned in a given year exceeding $10 will be taxed as income. Dividends paid in the account are also subject to be taxed. Capital gains, however, must be realized in order to be taxed. What does “realized” mean? Well, when an investment appreciates in value, it is considered an unrealized gain because you have not sold the investment, thus it can still lose value or continue appreciating. Thus an unrealized gain cannot be taxed since its value can still fluctuate up or down. Once a stock is sold however, a taxable event has occurred.

Choosing a Broker: 3rd Factor

• Experience: If you have been investing for years, and know the ropes pretty well, then a self service brokerage would be a better fit as you won’t need someone managing your account and explaining to you how certain investments work. Depending on how experienced you are, you could apply for Margin or Options trading (I will get into what these are later) to further expand your investment choices. If, however, you are new to investing, you may want to stick to a full service brokerage firm and let them manage your portfolio. This isn’t to say a novice investor can’t start off with a self service brokerage firm, but the2 previously mentioned factors should be taken into serious consideration before making such a decision. Many novice investors have their retirement money with a full service brokerage firm and keep their “play” money in a self service brokerage firm. This way they avoid the risk of losing their retirement money and only “play” with money they aren’t relying on for retirement. This could also be another form of spreading your risk.

Choosing a Broker: 2nd Factor

• Risk: As mentioned above, age is a huge factor when determining risk. However, you don’t have to be close to retirement to be a conservative investor. Regardless of your age, if you simply don’t have the time or patience to make your own investment decisions, then a full service brokerage firm would better meet your needs. If you do however have plenty of time and patience to do your own research and make your own decisions, then a self service brokerage firm would be a better fit. Thus if your portfolio loses value, you have no one to blame but yourself, however if your portfolio triples, you will take pride in your investment decisions!

How to Choose a Broker

Now that we have established the major differences between full service and self service brokerage firms, how do we choose which firm best fits our needs? There are several factors one should take into consideration when making such a decision, but to keep it simple, I have chosen what I believe are the top 3 factors. The first factor is:

• Age: Are you close to retirement, or are you young? Many may wonder why this is a factor. In most cases, people close to retirement tend to be more conservative. Their risk tolerance is a lot lower then say, younger investors. Thus they may not want to make their own investment decisions, and rather leave that up to professionals. In this case, a full service brokerage firm would best fit their needs. Young people tend to have a higher risk tolerance because they know they still have plenty of time to recuperate any losses they may encounter. In this case they may choose to make their own investment decisions, and thus a full service brokerage firm would be costly and unnecessary.

Types of Brokerage Firms

When deciding to start investing in stock, one should always take into consideration what type of brokerage firm to use. Like choosing banks, you want to look at each firm’s products and all associated fees. There are typically 2 types of brokerage firms, full service and self service. Well what’s the difference?

• Full Service brokerage firms, such as Goldman Sachs and Merrill Lynch, typically charge higher fees. Although their services are more costly, since they offer advice, it takes the annoyance out of having to pick your own stocks. They will assign you a financial advisor who will identify your investment goals and risk tolerance (among other things), and prepare a portfolio which will best match your investment objectives.
• Self Service brokerage firms, such as E*trade and Scottrade, typically charge lower fees. However, the burden to pick stocks and manage your portfolio falls on you. You will receive no financial advice from the firm, hence the “self service” concept.

Introduction

My name is Nick Garcia and I am currently interning at a brokerage firm. I have learned tons of information since my employment with them, and simply wish to share my knowledge with you in the simplest terms possible. I plan to receive my Series 7 & 63 licenses this summer to become a stock broker, thus it’s important to remember that I am not a licensed broker, and therefore my postings are simply meant to be of guidance and not advice. Please consult your advisor before making any financial decisions. Some information shared may either be out of date (due to constant changes in regulations) or personal opinion. Again, it’s important to consult your advisor before making any decisions based on my postings. Thank you for reading my blog and I hope you find it interesting and easy to understand!