A growing number of investors like buying stocks without a broker because they’re able to avoid possible conflicts of interest and save on broker fees. However, it’s especially important to know what to buy if you’re not using a broker
Many investors assume their broker is honest and has their best interests at heart; if this proves to be untrue, they will shop for better stock trading advice from a new broker. Of course, many investors decide on buying stocks without a broker. That can be a successful strategy if you choose the best options for your investment temperament—using our Successful Investor approach.
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Buying stocks without a broker: Why it might be a smart move for some investors
As any good stock broker or experienced investor can tell you, bad brokers are all too common. By “bad brokers,” we mean those who put their own interests above that of their clients. Keep in mind, however, that most bad brokers do this in a perfectly legal fashion, by catering to their clients’ whims and weaknesses.
Here are three main practices that bad stock brokers often practice:
Aiming for stability rather than growth
Stressing low-risk, low-return, high-fee structured products in client accounts
Additionally, you may have noticed that your broker sometimes uses unfamiliar words and phrases to describe investment concepts. Some of this stock broker jargon is simply shorthand that brokers use among themselves, to refer to familiar situations without having to go into any detail on the underlying concept. However, the concepts that these “broker-ese” words and phrases represent also serve to further the goals of the brokerage business.
If you find yourself thinking in broker-ese, you’ll naturally make assumptions that are in tune with the goals of your broker. They may be out of tune with yours.
Here’s one example: from time to time, your broker may advise you to sell a particular stock you own because it represents “dead money.” This doesn’t mean there’s anything wrong with the stock, or the company. Instead, your broker simply thinks the stock may only go sideways for a period of months or longer, producing no capital gains for you. So they naturally feel you should sell it and buy something with better short-term capital-gains potential.
To do so, of course, you have to pay one commission to sell and another to buy. You may also face some costs from the bid-ask spread. If you make money on the sale and the stock is outside your RRSP or other registered account, you’ll have to pay capital-gains taxes, which will leave you with less capital to reinvest.
Taking all that into account, putting up with a little “dead money” in your portfolio doesn’t seem so bad.
Besides, many stocks qualify as “dead money” much of the time. That’s because they go sideways over long periods; their biggest gains occur in unpredictable spurts. Risk is relatively low in a high-quality stock that is going through a “dead-money” phase, by the way. But profits can be spectacular when it comes back to life.
Rather than trying to stay out of so-called “dead-money” stocks, it’s better to focus on building a portfolio that can produce a growing stream of dividends for you, plus long-term gains.
Some investors may look at online trading as a fairly quick and convenient way to build wealth while buying stocks without a broker. Still, there are many hidden dangers that may not be easy to spot at first.
The main risks of online trading come from the fact that it all may seem deceptively easy. The lower costs and higher speeds of online trading can lead otherwise conservative investors to trade too frequently. As a result, you could wind up selling your best picks when they are just getting started.
The apparent ease of online trading may even encourage conservative investors to take up short-term trading or day trading. That’s just another danger of trading stocks online—there’s a large random element in short-term stock-price fluctuations that you just can’t avoid.
Here are two additional risks that frequently crop up with online trading. Both can seriously hurt your long-term returns:
Buying stocks without a broker: Automated stock-picking systems can backfire
Some investors who trade stocks online use automated stock-picking systems to help them make investment decisions. These systems are typically marketed with impressive-looking performance records designed to make investors think they are sure to make guaranteed profits. However, those records are typically derived by “back-testing” the program against past data. In other words, the promoters go back through old trading records and see what would have worked in the past.
Practice accounts can breed false confidence: Some investors are nervous about trading stocks online. So, instead of jumping right in, they start off by using the “practice accounts” or “demo accounts” that the online brokerage industry initiated several years ago. The big risk with practice accounts is that you’ll try out a risky and ultimately unwinnable investment approach, like day trading or options trading, and hit a lucky streak. This could embolden you to put serious money at risk just when your results are about to regress to the mean. This will deliver losses instead of profits.
Buying stocks without a broker: Use our Successful Investor philosophy to choose stocks
Whether buying stocks without a broker or with, we recommend investors build a portfolio mostly comprised of well-established companies. As well, some of the biggest profits you ever make will come from buying stocks before they find their way into the limelight.
Above all, we recommend using our Successful Investor approach. One key part of our three-part investing program is to diversify—spread your money out across most, if not all, of the five main economic sectors: Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities. Diversifying your stocks across the five sectors is more than just a safeguard—it will significantly improve your chances of making money.
Have you invested with a bad stock broker? What happened that made you realize the relationship wasn’t good for you?
This article was originally published in 2018 and is regularly updated.
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