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Investing

How Brokerage Accounts Work

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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.

Fees

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.

Account minimums

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.

Eligibility

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.

Final thoughts

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.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Sarah Sharkey |

Sarah Sharkey is a writer at MagnifyMoney. You can email Sarah here

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Investing

7 Places to Find Free (or Almost Free) Investing Courses

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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When it comes to investing success, you need a little luck and lot of know-how. While we can’t help with your luck, there are options aplenty when it comes to learning the ins and outs of investing.

7 low-cost investing courses you can take online

Whether you are the DIY type and want to manage your own investments or you want to better understand what a professional advisor is doing with your money, there are many low-cost classes and tools to help you build a brighter financial future. Even better, most of them can be completed online, on your own time and without leaving your house. Here are seven sources for free (or nearly free) investment courses.

1. Your broker

Let your broker help you if you have one. Many brokers offer online courses and educational tools to their customers. Some provide access to those resources even if you aren’t a customer.

For example, Fidelity offers a host of webinars, courses and coaching sessions to customers who want to be more actively involved in their investment decisions. Noncustomers can sign up for a free 30-day guest account, which provides access to some of those offerings as well.

TD Ameritrade also has a robust education page with free options for clients, including an immersive curriculum, videos and webcasts. For clients and nonclients alike, it offers free in-person educational seminars, but you’ll have to leave your house for those.

2. Morningstar

It’s amazing how much information is out there for the taking once you know where to look. For example, Morningstar provides a host of investment information options, including breaking news about the markets and advice on the best picks. It’s the Investing Classroom, however, that lets you really dig in. It offers 172 free online classes that cover stocks, bonds and more as well as tools to help you track your progress as you complete them.

You can register to take quizzes and earn rewards, such as free access to Morningstar’s premium service. Most of the classes consist of reading the course material and then taking a quiz to make sure you’ve absorbed it. How quickly you read will determine how quickly you’re able to complete the courses.

3. Udemy

Udemy offers online video courses that cover topics including everything from photography to marketing, but it has a strong selection of personal finance classes as well. There’s a fee for classes, but most are quite affordable. For example, well-rated courses such as “Easy Market Profits: 3 Step Stock Investing Strategy” and “Investing for Busybees” each cost about $20 (or less if you purchase them on sale).

You can search for courses by topic, by the ratings of others who have taken the courses, or by the number of hours the courses take to complete. Courses range from one to 17 hours and include on-demand video instruction, e-books, quizzes and more.

4. iTunes U

You can find free courses on almost anything you can think of, including investing, through iTunes U. They come from some of the top schools and leaders in the industry, and they’re all free. For access, just download the iTunes U app on your iPhone, iPad or iPod Touch and then scroll through the vast course offerings.

You can search by term, such as “stock market,” and download a course on financial theory from Yale University, which includes video instruction, reading materials and more. It provides access to almost everything you’d get if you were sitting in the classroom (except an invite to that big campus kegger).

5. Online college courses

For a top-notch education on investing, you don’t have to head off to campus or pay a pricey tuition bill, as many colleges and universities offer free online access to courses, including those on finance.

For example, Massachusetts Institute of Technology’s OpenCourseWare program offers online access to an array of courses, including video and audio lectures, assignments, exams, and more. You can take a course on investments, see the lectures, read the materials and take all the tests. Some are translated into other languages as well. You don’t even have to register. Just click, and access to an abundance of education is yours.

Other institutions of higher learning offer free online courses at edX. There, you’ll be able to glean the same information you would have if you’d attended a school like Harvard University, the University of California, Berkeley or the University of Texas. You can search for courses by topic and either choose to pay a fee to receive a certificate of completion or absorb the knowledge for free. For example, a verified certificate for the eight-week course on long-term financial management offered by the University System of Maryland costs $249, but you can complete the course at no cost if you don’t want or need the certificate.

6. eXtension

A comprehensive home study course on investing is available through eXtension. It’s offered as a collaboration between Rutgers Cooperative Extension, the U.S. Department of Agriculture, the U.S. Securities and Exchange Commission, and Financial Security for All. The free course consists of 11 units, including “Finding Money to Invest,” “Investing Small Dollar Amounts” and “Investment Fraud.”

All the materials are written, so you can read at your own pace. They’re also free, and in some cases, you may be able to get continuing education credit for completing a posttest.

7. Skillshare

If you can think of something you want to learn, Skillshare probably has an online course on it, and investing is no exception. Skillshare offers access to more than 25,000 online classes, and its investing course offerings are vast, including “Investing Basics for Millennials” and “Demystifying Cryptocurrency: Understanding Bitcoin and Beyond.”

The instructional videos range from a few minutes to several hours, and they’re taught by industry professionals. There are a significant number of free offerings, though some require a premium membership, which runs about $99 a year. It currently is offering a three-month premium membership trial for 99 cents, which may be a bargain if you’re good at cramming.

Investing information is there for the taking. It’s up to you just how deep you want to dig and how much time you want to spend. While education is always a valuable undertaking, when it comes to educating yourself about investing, it can pay off quite literally.

Looking for more help? Check out five places to get free financial advice.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Julie Ryan Evans
Julie Ryan Evans |

Julie Ryan Evans is a writer at MagnifyMoney. You can email Julie here

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Early Withdrawals From a Roth IRA: How to Avoid Penalties

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

A Roth IRA is a handy investment tool that lets you contribute pre-taxed funds to the account, allowing your money to grow over time. Taxed contributions mean you won’t pay any taxes when you’re ready to withdraw your money in retirement. In 2019, you can contribute up to $6,000 into a Roth IRA annually if you’re under age 50. It bumps up to $7,000 if you’re over the age of 50 (although income limits apply).

But the other benefit of a Roth IRA is that you don’t have to wait until retirement to take money out. When you use the funds the right way — such as a down payment on a house or to pay for college — you can take an early withdrawal from your Roth IRA without paying any penalties.

“When we’re talking about how to save money and where to put it aside, we’re looking now at the idea that using a Roth is almost a surrogate savings account and college fund and retirement fund,” said Dennis Nolte, a financial planner in Winter Park, Fla.

Understanding earnings vs. contributions

One of the key things to understand about a Roth IRA is that there are two parts to the money within the account: There’s the money you put in (contributions) and the money that grows in the account via investing (earnings). So, if you open a Roth with $5,000 and after two years the money has grown to $6,000, you have $5,000 in contributions and $1,000 in earnings.

It’s important to understand the difference between the two because you can only avoid taxes and penalties by withdrawing your contributions — and not earnings — before the age of 59 and a half. “You can take the principal out tomorrow because it’s already been taxed,” said Nolte.

Withdrawing from contributions

You can essentially take out contributions from your Roth IRA at any point without incurring taxes or a Roth IRA early withdrawal penalty. If you contribute $1,000 to a Roth today, you can withdraw $1,000 from the Roth tomorrow (although that’s not a sound savings strategy) because you’ve already paid taxes on that money.

Withdrawing from earnings

Earnings in a Roth IRA must be left in the account for at least five years or until the account holder reached the age of 59 and a half — whichever is longer. If you withdraw earnings early, you’ll owe taxes on the money and a 10% penalty.

The five-year waiting period begins on January 1 of the year you made your first contribution. As long as your withdrawal is five years from January 1 of the first year you contributed and you’re at least 59 and a half years of age, you’re in the clear. This rule applies to each Roth you may have.

You may be able to withdraw from earnings without paying taxes and penalties if you’ve had the Roth IRA for at least five years and one of the following applies:

  • The money was used for a first-time home purchase, up to a $10,000 lifetime limit.
  • You are permanently disabled.
  • You died, and your heirs received the money after your death.

You may also be eligible for early withdrawals from your earnings without incurring the 10% penalty, but you’ll still owe income taxes. Early distributions from a Roth IRA that qualify for this rule are as follows:

  • You have reached the age of 59 and a half.
  • You are permanently disabled.
  • You are the beneficiary of a deceased IRA owner.
  • You use the money to buy, build or remodel a first-time home.
  • The distributions are part of a series of substantially equal payments.
  • You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income for the year.
  • You’re paying medical insurance premiums while unemployed.
  • The distributions aren’t more than your qualified higher education expenses.
  • The distribution is due to an IRS levy of the qualified plan.
  • It’s a qualified reservist distribution.

There’s one other exception to this rule: If you withdraw your contributions and earnings from a Roth IRA by the tax deadline for the year in which you made that contribution, the IRS treats your contribution as though it had never happened. However, you must claim any earnings as income for that year on your tax return.

Withdrawing from a Roth conversion

The rules are slightly different if you convert a traditional IRA to a Roth: you must wait at least five years before you withdraw from that IRA. The five-year clock starts on January 1 of the year you made the conversion. You’ll owe income taxes and a 10% penalty for early withdrawals.

Reporting Roth IRA withdrawals

You’ll need to file a Form 8606 when it’s time to file your taxes in the year that you take withdrawals from your Roth IRA. Be sure to inform your tax professional or advisor so they can help you stay on top of your finances.

Bottom line

A Roth IRA is a great way to diversify your retirement savings, particularly if you think you’ll be in a lower tax bracket in retirement. You have limited options if you want to take money out of your Roth before retirement. Be sure to educate yourself on all the rules to prevent getting hit with penalties that will only erode your nest egg.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Kate Ashford
Kate Ashford |

Kate Ashford is a writer at MagnifyMoney. You can email Kate at kateashford@magnifymoney.com

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