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Mutual Fund vs Brokerage


Differences between online brokerage company vs mutual fund for IRA (roth, traditional), investing account in 2017. Which is better?



Let’s Look at Brokerage Accounts vs. Mutual Funds


Do you want to know what a brokerage account is? Do you want to know about mutual funds? This article will explain them to you. Then we will give you some advice. After you have read this article, you will be ready to start investing.


Brokerage Accounts


A brokerage account, also called a securities account or trading account, is similar to a bank account. At a bank, you deposit money. It goes into a checking account or savings account. Or maybe it goes into a certificate of deposit.

You have many choices at a bank. Whichever account type you choose, the bank will hold your money. Some accounts pay interest every month. You can make money by earning this interest.

The bank will protect the money you deposit. The government provides FDIC insurance up to $250,000 per customer. If you deposit $100, that $100 is guaranteed. It won’t go down to $99.

A brokerage account is similar to a bank account. But there are important differences. A brokerage account holds securities. These are things like stocks, bonds, option contracts, ETF’s (exchange-traded funds), and mutual funds. Securities cannot be held at a bank. Because a brokerage account holds securities, sometimes it is called a securities account. Securities are traded. That means they are bought and sold. So a brokerage account is also called a trading account.

A brokerage account is protected by SIPC. This is not the FDIC. The FDIC is the government. SIPC is a group of brokerage companies that protect the securities in your account. The amount of insurance is $500,000 per customer.

A brokerage company is sometimes called a broker or broker-dealer or brokerage house. The terms mean the same thing. It is a place where securities are held and traded.


Mutual Funds


At a bank, you put your money into a checking account or savings account. But at a broker, you don’t do this. Instead, you put money into a stock or bond or other security. One popular type of security is a mutual fund. The word ‘fund’ means a basket or collection. A fund holds many different securities. These can be stocks or bonds or both. It is safer to have many securities instead of just one. That’s why mutual funds are popular.

The price of mutual funds and other securities goes up and down. This is why securities aren’t held at a bank. If you put $100 in a bank account, it won’t go down. But a security’s price could go up or down. If you put $100 in a mutual fund or stock, it could go down to $99 or $80 or even $0. But it could go up to $300, much higher than a bank account can go.

When you buy a mutual fund, the price is called Net Asset Value, or NAV. This is based on all the prices of the securities in the fund. The NAV can go up or down. Usually it changes every day. You want to buy at a low NAV and then sell the fund later at a high NAV. Sometimes there is a fee to buy or sell a mutual fund. Not all brokers charge this fee, but some do.

When you buy a mutual fund, you buy shares of the mutual fund. If the NAV is $20, and you deposit $100, you get 5 shares. These 5 shares are held at the broker. They are protected by SIPC. But SIPC does not guarantee the mutual fund’s price. It only makes sure that the 5 shares stay at the broker.

Some brokers offer lots of mutual funds. Others provide less. You can call and ask how many funds a broker offers. Sometimes a broker will say on its website how many funds it has. A mutual fund screener on a broker’s website can also tell you.


Individual Retirement Accounts


A mutual fund can be held inside an Individual Retirement Account, also called an IRA. Many brokers offer IRA’s. They help people save money for retirement. The government does not tax the account. This can help the IRA grow more.

Some mutual funds were created to help people who invest for retirement. These funds are called target-date funds. The target date is when you think you will stop working. The mutual fund becomes less risky (less likely to go down in price) as the target date approaches. This is important. You don’t the fund to go down when you are near retirement.


Ready to Open a Brokerage Account?


When you decide to open a brokerage account, there are many brokers to choose from. Like banks, they all have different fees and prices. You will want to read about each broker. You can also call and ask questions. Some brokers might charge a fee every year for having an account. Other brokerage firms will not.

TD Ameritrade is one broker. It has customer service 24 hours a day, 7 days a week. There are more than 11,000 mutual funds there. You can open an IRA. TD Ameritrade’s website has lots of learning materials for beginners. The broker has professional financial advisors who can help you manage your investments.


Mutual Fund vs Brokerage Account Review


If you can use a bank account, you can learn to use a brokerage account. If you choose the right broker, you will have someone to help you.


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Updated on 7/25/2017.





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