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Updated on Tuesday, November 20, 2018
You’ve saved up a healthy emergency fund and have a handle on your debts — what’s the next step in your financial journey? For many, learning how to invest their spare cash is a good financial move.
But taking that step can be hard, and the number of investments options you have may seem overwhelming. However, if you’re ready to start investing, consider opening a brokerage account.
What is a brokerage account?
A brokerage account is a means for investors to invest in the stock market. Brokerage accounts are operated through licensed brokerage firms. Through the account, investors can deposit funds and buy investments. The types of investments usually purchased through a brokerage account include stocks, mutual funds and bonds.
Once you set up a brokerage account, you will be able to buy and sell investments through the account. Although the account is through a firm, the investor will be the owner of the account’s assets.
Think of your brokerage account as a gateway to investing. Through the account, you will be able to make purchases and trades. The amount of flexibility you have within your account will depend on the firm you choose to work with. Let’s take a closer look at the most common requirements of these accounts.
Each brokerage firm will have a slightly different structure, but every firm will include fees of some kind. The most common fees are outlined below. Before you get started with a brokerage firm, you need to understand the fee structure.
- Brokerage fee. An annual or monthly fee that is charged to maintain your account. The fee could include add-ons, such as access to specialized research. The fee may be a flat fee or standard percentage; some firms enforce a combination of both.
- Transaction fee. Every time you buy or sell a stock, you will be charged a fee. It is typically a flat fee, but the amount will vary by firm. These fees can add up quickly if you make a lot of trades. Transaction fees can also apply to mutual funds.
- Management fee. When your account is managed by a broker, they will charge a fee for that maintenance. The fee is typically a percentage of the total assets managed by the advisor. The more involvement provided by the brokerage firm, the higher the fee.
Many firms have account minimums in place, though the exact amounts vary widely by firm. Some accounts will require thousands of dollars as a minimum, while others will require only a small amount. Typically, accounts that offer smaller minimums will require you to make regular deposits. If your balance falls below the minimum, you will likely be charged a fee.
Brokerage accounts do have some limitations on who can open them. There are some basic requirements to meet, such as requiring account holders to be 18 years or older and have the money to fund the account. Both of these are fairly simple to achieve.
Depending on the brokerage firm you choose to work with, there may be other hoops to jump through. Some require more information about your employment status. Others may ask questions about your net worth. Be prepared to answer a variety of questions when you fill out the application.
Cash or margin
When you sign up for a brokerage account, you often have the choice between a cash account or a margin account. A margin account will allow the broker to lend money to the investor in order to finance investment purchases.
You will need to determine whether you want to purchase your investments with saved cash or through a loan. Typically, a cash account is a safer, cheaper option for new investors.
What to look for in a good brokerage account
The number of available brokerage firms is substantial, but don’t just choose one randomly. In the long run, it’s vital that you find the appropriate brokerage firm for your needs. Otherwise, you may be paying too much for services you don’t use.
You should be able to find one that fits your needs with a little bit of research. Before you commit, consider these factors.
Choose between a full-service broker and a discount broker. A full-service broker provides a more personalized service to each customer. You should expect access to extensive research, specialized advice and more. A discount broker allows you to perform trades but offers less personal advice. The advantage of a discount broker is that the fees involved are substantially less.
Compare the fees. Research the fees levied by each firm. Think about the frequency you plan to trade and the account balance you would like to maintain. The fees associated with each could add up quickly if you choose a bad match.
Investment opportunities. Not every brokerage firm offers every type of investment. Choose a firm that offers a variety of investment vehicles that suit your needs.
Educational resources. Some brokerage firms give you access to information about potential investment opportunities. As an investor, access to the right information can be critical to success. If you plan to do your own research on investments, having organized information in one place is a time saver.
User experience. If you’re choosing an online brokerage firm, check out the website. You want the site to be easy to navigate and conduct business through. You don’t want to sign up for an account with a firm that has an outdated website.
Perks offered. Some larger brokerage firms offer incentives to sign up. Some firms offer cash bonuses for opening an account, for example, while others offer a certain number of free trades. Take advantage of an incentive if your needs align with that firm, but don’t choose a firm based solely on the new customer perks.
How to open a brokerage account
After you choose the brokerage firm, you will need to physically open the account. Here’s what you need to do.
Collect the paperwork. As with almost everything financial, there will be paperwork involved. You will need to provide some personal information which may include your Social Security number, driver’s license, employment status, net worth and more. The type and amount of paperwork will vary by brokerage firm.
Fill out the application. The application is usually an online process that takes a few minutes. Once you have filled out the application, you will need to wait for approval.
Fund the account. When your account is approved, you’ll need to fund it. You can use a variety of methods to fund your account, including an electronic funds transfer, wire transfer or check.
Research investments. When the account is funded, you will be able to make your first investment purchase. Before you order the purchase, do some research about the investment to make sure you fully understand what you’re buying.
Make a purchase. Finally, you can make a stock purchase through your investment account. After this step, you can continue to research and purchase investments in order to grow your account.
Opening a brokerage account could be the next step toward your financial goals. Before you get started, weigh your options carefully.
The best thing to do is not rush into any quick decisions about your brokerage account. The right brokerage firm can significantly improve your investment experience, and a better experience can lead to a more productive investment account.