So, you’ve decided to step away from your savings account and into the world of investing? That’s great! Your next step is to open a brokerage investment account – and don’t worry, it’s simpler than it sounds.
This article will list a few simple steps that you can take to ensure you find the best possible brokerage account for you. But first, let’s run through the basics.
What is a brokerage account?
A brokerage account is a type of financial account that allows you to buy and sell various types of investments, including:
(FDIC insurance guarantees the return of your money if the bank that issued the CD goes under.)
Why do I need a brokerage account?
If you want to invest in any of the investment options above, you’ll need a brokerage account. This is the only type of account that lets you hold these investments and trade them as you like.
Opening a brokerage account: step-by-step
Step 1. Choosing the type of broker to use
As you might expect, there are many broker-dealers out there competing for your business. Some of them promise to buy and sell your investments very cheaply or even for free, while others tout the value of paying more in return for better service. You'll need to decide for yourself which type of brokerage account will best suit your investment needs.
There are many different features to look for when choosing a brokerage account: account minimums, ease of use, fees... Go Deeper ->
What are the different types of brokerage accounts?
Full-service brokers are licensed financial professionals who can recommend specific securities, such as a particular stock or bond, that fits your investment strategy.
Here’s how it works:
- You tell the broker what you are trying to accomplish financially
- The broker analyzes your investments to assess the risk, and may provide other financial services such as investment research
- They then invest your money according to the goals you have set
Full-service brokers charge higher fees for a higher level of service.
Registered investment advisers
Unlike a low-cost brokerage account, an investment adviser charges you a percentage of assets under management. Some investment advisory services also charge by the hour in return for dispensing financial advice.
An online broker will allow you to invest with much lower fees. There are many of these financial institutions in the marketplace today, such as TD Ameritrade, E-Trade, Charles Schwab, and Fidelity.
Most online brokerage accounts provide several sources of investment research, although there may be a charge for this. Many online brokers also offer ready-made investment models tailored to various types of investment goals, time horizons, and risk tolerances.
A robo-advisor is a service that uses sophisticated algorithms to manage your money in the markets, adjusting your investments over time according to market conditions. These services generally charge less than human advisors and are an easy way to invest without having to make the investment decisions yourself.
Step 2. Filling out the application
Most brokerages today have websites or smartphone mobile apps where you can place stock & options trades, talk to back-office personnel or financial advisors, or do market research on investments. You can alternatively go to a branch office in your area and fill out an application in person if you prefer.
Applying for a brokerage account is a very similar process to opening a bank account or savings account.
You will be asked to provide:
- Your full name
- Physical and mailing addresses
- Social Security number
- Tax filing status
- Driver's license information
- Income bracket
Brokers use this information to prevent financial crimes such as theft and money laundering. Most of these questions are required by FINRA and/or the SEC.
All brokerage firms are also backed by SIPC (Securities Investor Protection Corporation) insurance, which protects investor assets if the brokerage firm should go bankrupt.
Step 3. Choose your account(s)
There are several types of brokerage accounts that you can choose from, depending on your investment objectives. All accounts can be divided into two camps: retail accounts and retirement accounts.
These are plain and simple taxable accounts with no special features. There are different types of retail accounts:
- Cash accounts - Fully funded at all times with cash
- Margin accounts - Allow you to borrow money from the brokerage firm to trade securities. You may be required to keep at least a certain minimum amount of money in this type of account at all times.
- Custodial accounts - Allow you to hold money for minors. They can't access the money in the account until they reach adulthood, and you can invest the money you put in them however you like.
- Trust accounts - If you have any type of trust, you can title your retail account in the name of the trust. The account will then become an asset of the trust.
- 529 Plan accounts - If your state allows you to invest your 529 plan in a self-directed brokerage account, then you can open this type of account with your broker.
Retirement accounts allow investors to put away money for their retirement plan. These accounts grow tax-deferred, and early withdrawal penalties apply for funds withdrawn under the age of 59 and a half.
The list of retirement accounts that you can open at a brokerage firm includes:
- Traditional IRAs - Contributions are tax-deductible within certain limits, and withdrawals are fully taxable at retirement.
- Roth IRAs - Contributions are nondeductible, but withdrawals at retirement are tax-free.
- SEP-IRAs - For self-employed investors.
- SIMPLE IRAs - For small businesses.
- Self-employed 401(k) plans - For sole proprietors.
- Keogh plans - For professional practitioners, such as doctors or lawyers.
Cash management features
All brokerage accounts contain a cash account where money is automatically deposited when it is not invested. Most retail brokerage accounts today also offer other cash management features, such as debit cards and checks.
Step 4. Funding your account
Brokerage accounts can be funded in several ways:
- Transfer funds directly from another account into your brokerage account
- Send to broker via check
- Send via bank transfer or wire transfer
Note: you cannot open a brokerage account with a credit card.
Step 5. Choose your preferences
When you sign up for your brokerage account, you'll also have to choose whether to receive your trade confirmations by mail or email. Most people today choose the latter option, but it will depend upon your personal preference. The same goes for your monthly statements.
Step 6. Know how you're being charged
When you start shopping for a trading platform, you will find that many online brokers offer commission-free trades. These brokers make up for the loss of commission by filling your trade orders at a higher-than-market price if you are buying or a lower price if you are selling.
If you plan on trading extensively, you may be better off paying a small commission per trade and getting filled at better prices than trading commission-free.
If you plan on placing a small handful of trades and then holding on to your picks for the long term, this may not be an issue.
When you are researching a particular broker to see whether you want to use them, be sure to compare the fees that they charge to the services that they provide. Figure out how much assistance you require in your investments, and much you want to pay for that help.
Example: You could choose a mutual fund through an online broker and buy it very cheaply, but a full-commission broker may know of a much better fund to invest in, though it will cost you more to buy. The higher cost may be worth it in some cases.
Investing can be daunting, but remember – it’s simpler than you might think, especially once you get the ball rolling with a brokerage account. So long as your money works harder than you do, you’re on track to achieve your financial goals.
Does opening a brokerage account affect credit?
No, unless you buy an investment and then don’t pay for it. This will hurt your credit in most cases.
Can you open a brokerage account under 18?
No, you must be a legal adult to open a brokerage account. Your parent or guardian can open a custodial account and let you fund it, but they will have the final say on the investment choices you make.
What do you need to open a brokerage account?
You’ll need to provide your Social Security number, date of birth, address and contact information. Some brokers may need to make a copy of your driver’s license or Social Security card.
How can I withdraw money from my brokerage account?
It depends upon the banking services offered in the account. You can always ask the broker to send you a check or wire money to you. You may also be given a book of checks and/or a debit card that you can use to draw money directly out of the account. Online brokers usually have a quick and easy 'withdraw' button.
How can I transfer my brokerage account?
First, you’ll open a new account at the financial institution where you want to transfer your money. Then you’ll fill out a transfer form with your new account, and the receiving institution will send the transfer request to your current broker. Your current broker will then send your funds directly to your new account.
Is my money safe in a brokerage account?
Yes. It’s highly unlikely that your brokerage will go bankrupt. Go Deeper ->
Why should I invest?
Investing is a way to grow your wealth. It lays the foundation for a comfortable life (things like buying a home, sending your kids to college, travelling, starting a business) and retirement. Go Deeper →
What should I invest in?
Investing is personal. Investment goals vary and different investment categories will suit different investors. Possible investment options for beginners include: stocks, bonds, mutual funds and index funds & ETFs.
How much money do I need to start investing?
You can start investing with any amount of money. Choose an investment app with no account minimums. If possible, invest regularly to build your portfolio over time.
Will I lose money if I invest?
Investing comes with risk. It is important to understand risk before investing, and to have a long-term investment plan.
Where can I learn more about investing?
Investing is an important part of personal finance, but it’s often overlooked. To learn more consider exploring a stock market course, or reading an investment book. You could also consider using an investing simulator. Members of Crux Investor also have access to a large library of educational content.