The beginning investor is often overwhelmed by the options available. There are a number of places to open investment accounts, many of them providing do-it-yourself options. Some of the more popular do-it-yourself accounts are found at discount brokers and mutual fund companies. These financial services companies offer you the chance to invest with the help of research tools, and with the help of platforms that allow you to execute your trades, or set up recurring investments, on your own.
While discount brokers and mutual fund companies offer overlapping investment choices, it is important to note that there are differences between the two. Here are some of the basics:
Discount brokers offer limited investment services, allowing you to invest with lower commissions. Many discount brokers charge a flat fee for trades that you make. Discount brokers often offer a limited selection of investment options, though. You may be limited to stocks, mutual funds, CDs, ETFs and other basic investment products. Additionally, some of the research may not be as in-depth as what you would get at a mutual fund company. However, for most beginners, the research tools are sufficient.
You do have the option, with many discount brokers, to call and talk with a professional, but such sessions will cost you. The low cost trades, plus the fact that, for beginners, the investment choices you do have are usually adequate, make discount brokers an appealing choice. For the more advanced trader looking for complex investment options, or for the investor who trades frequently, a discount broker may be inadequate.
Popular discount brokers include Scottrade, Etrade, ShareBuilder, TradeKing, and Zecco. See a full list of discount brokers.
Mutual Fund Companies
Mutual fund companies do have some self-service features, but it is important to note that when you work with a mutual fund company you are dealing with those who are more interested in providing full service investment services. These companies exist mainly to encourage you to invest in the mutual funds that they put together. Discount brokers offer you access to investment opportunities, but they do not normally put funds together. Mutual fund companies, on the other hand, often construct and manage the funds they offer.
Because you are dealing with “experts”, you can expect to pay higher commissions. You might also need to have a much higher minimum deposit if you want to open a trading account. Mutual fund companies may offer a wider variety of asset classes and opportunities, as well as more in-depth research. For most beginners, there is little need to have returns eaten away by the higher fees charged by mutual fund companies; discount brokers work just fine – especially if you are interested in stock trades and don’t have the capital to open an account at a mutual fund.
When it comes to IRAs, though, there are more similarities than differences between discount brokers and mutual fund companies. Many mutual fund companies offer IRAs with fees, commissions, minimums and recurring deposit options that are similar to discount broker offerings. If you like to keep your accounts together, though, and you plan to do a little trading with stocks as well as open an IRA, as a beginner it might be useful to choose a discount broker.