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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

Should You Pay Off Debt or Save Your Money?

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 have a regular source of income, you’re paying your bills on time and you have some extra dollars left over each month. What should you do with that extra cash?

If you don’t have debt (lucky you!), then the choice is simple — save or invest as much as possible. If you have debt, however, the choice can be a bit murkier: Should you pay off your debt first or save? Here are some things to consider when asking yourself that question.

Three times that saving your money might be smarter

1. If you don’t have an emergency savings fund

Just when you’re cruising along, life can throw some unexpected and expensive curves your way. A sudden job loss, medical bills or car repairs can pop up out of the blue, and if you don’t have the funds to pay for them, you can end up seriously in the red. To cover unexpected costs, some may resort to high-interest credit cards and loans. Those kinds of moves can dig you into a financial hole that can take years to pay your way out of.

Saving up a healthy emergency fund can protect you in instances like these. How much should you save? Experts generally suggest that you should save an amount equal to between three and six months of living expenses. Depending on your individual circumstances, however, you may need more than that. (Check out this article to figure out how much to save and where to keep it.)

2. Your employer offers matching retirement contributions

If you’re fortunate enough to work for a company that offers a retirement plan with matching contributions, then consider making that method of saving a priority.

For example, if your employer offers to match your contributions dollar-for-dollar up to 6% of your salary in a 401(k) plan, then contribute at least that much, if possible. The money can then grow in a tax-free or tax-deferred 401(k) until you withdraw it in retirement — all that compound interest can really add up over the years. If you don’t contribute up to that amount, you’re leaving free money on the table.

Note, however, that If you need to withdraw these funds early (before the age of 59 and a half and before the account is five years old) there will be penalties to pay. That makes this a better tool for long-term savings rather than for the short-term or as an emergency savings fund.

3. Your debt has a very low interest rate

Debt gets a bad rap — often for good reason — but in some cases, carrying your low-interest debt and investing or saving your funds instead may be more beneficial. For example, the current fixed interest rate for direct subsidized and unsubsidized student loans is 5.05%, and the average 30-year fixed mortgage rate is about 4.3%. The stock market, on the other hand, has gone up an average of 10% a year since 1926.

Beyond comparing interest rates, however, you also need to assess how much risk you’re willing to take and how much access to your savings that you’ll need. Of course, there are no guarantees that your investments will perform well, and paying down debt comes with zero risk. Savings accounts are a less risky saving option, but the average interest rate is often less than 1 or 2%. Other options, such as individual retirement accounts (IRAs), have restrictions on how the funds can be used outside of retirement.

Four times debt repayment may be more beneficial

1. You have high-interest debt

It’s hard to get ahead of high-interest debt, because compound interest is working against you. Credit card interest rates, for example, average between 15 and 20% — an amount which adds up quickly. If you make the minimum payment, you may not even be making a dent in the principal amount owed, and you can spend years just paying interest. Calculators like this one can help you figure out just how much interest you’ll pay and how long it will take to pay off.

If you have high-interest debt, make sure you explore all the options for paying it down, including consolidating your debt and researching balance transfer cards.

2. Your debt doesn’t offer any benefits

Though your debt is costing you in interest, you might find that some loans may offer useful perks. For example, federal student loans may offer tax benefits and even loan forgiveness programs for eligible borrowers. Similarly, there are tax write-offs for mortgages and in many cases, the money you invest in a home will pay off down the line when you sell your property.

On the other hand, the debt on the credit card you maxed out to pay for that trip to Cabo comes with no benefits — just a bunch of interest. High-interest debt with no benefits should be at the top of your pay-off priority list.

3. You want to raise your credit score

While there are many factors that go into determining your credit score, the amount of debt you carry is an important component. If you plan to buy a home or secure a loan in the near future, take a look at your debt-to-income ratio (DTI), which many lenders consider before approving you for a loan. If your DTI is high, you may want to consider paying off some debt before applying for that new loan, which may result in lower interest rates for you later.

4. Your debt stresses you out

Debt can take an emotional and physical toll on people, ranging from depression to insomnia and more. When it feels like a black cloud hanging over your head and it’s affecting your life in negative ways, it may be in your best interest to prioritize paying debt off first.

Should you pay off debt or save?

Of course, saving vs. paying off debt early doesn’t have to be an either/or situation — ideally, you can do both at the same time. If, however, a choice must be made between the two, there are many factors to consider. As with most financial moves, there are no cut-and-dry rules, and the best one for you will depend on your individual circumstances.

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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Investing

How to Make Money in Stocks

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.

Putting money in the market is well-worn financial advice for a reason: Investing in stocks is one of the best steps you can take toward building wealth.But how, exactly, is that wealth built? How is money earned by purchasing stock market holdings, and what can you do to maximize the gains you make from your own portfolio?

How to make money in stocks: 5 best practices

The way the stock market works — and works for you — is as simple as a high school economics class. It’s all about supply and demand, and the way those factors affect value.

Investors purchase market assets like stocks (shares of companies), which increase in value when the company does well. As the company in question makes financial progress, more investors want a piece of the action, and they’re willing to pay more for an individual share.

That means that the share you paid for has now increased in price, thanks to higher demand — which in turn means you can earn something when it comes time to sell it. (Of course, it’s also possible for stocks and other market holdings to decrease in value, which is why there’s no such thing as a risk-free investment.)

Along with the profit you can make by selling stocks, you can also earn shareholder dividends, or portions of the company’s earnings. Cash dividends are usually paid on a quarterly basis, but you might also earn dividends in the form of additional shares of stock.

Micro-mechanics of how stocks earn money aside, you likely won’t see serious growth without heeding some basic market principles and best practices. Here’s how to ensure your portfolio will do as much work for you as possible.

1. Take advantage of time

Although it’s possible to make money on the stock market in the short term, the real earning potential comes from the compound interest you earn on long-term holdings. As your assets increase in value, the total amount of money in your account grows, making room for even more capital gains. That’s how stock market earnings increase over time exponentially.

But in order to best take advantage of that exponential growth, you need to start building your portfolio as early as possible. Ideally, you’ll want to start investing as soon as you’re earning an income — perhaps by taking advantage of a company-sponsored 401(k) plan.

To see exactly how much time can affect your nest egg, let’s look at an example. Say you stashed $1,000 in your retirement account at age 20, with plans to hang up your working hat at age 70. Even if you put nothing else into the account, you’d have over $18,000 to look forward to after 50 years of growth, assuming a relatively modest 6% interest rate. But if you waited until you were 60 to make that initial deposit, you’d earn less than $800 through compound interest — which is why it’s so much harder to save for retirement if you don’t start early. Plus, all that extra cash comes at no additional effort on your part. It just requires time — so go ahead and get started!

2. Continue to invest regularly

Time is an important component of your overall portfolio growth. But even decades of compounding returns can only do so much if you don’t continue to save.

Let’s go back to our retirement example above. Only this time, instead of making a $1,000 deposit and forgetting about it, let’s say you contributed $1,000 a year — which comes out to less than $20 per week.

If you started making those annual contributions at age 20, you’d have saved about $325,000 by the time you celebrated your 70th birthday. Even if you waited until 60 to start saving, you’d wind up with about $15,000 — a far cry from the measly $1,800 you’d take out if you only made the initial deposit.

Making regular contributions doesn’t have to take much effort; you can easily automate the process through your 401(k) or brokerage account, depositing a set amount each week or pay period.

3. Set it and forget it — mostly

If you’re looking to see healthy returns on your stock market investments, just remember — you’re playing the long game.

For one thing, short-term trading lacks the tax benefits you can glean from holding onto your investments for longer. If you sell a stock before owning it for a full year, you’ll pay a higher tax rate than you would on long-term capital gains — that is, stocks you’ve held for more than a year.

While there are certain situations that do call for taking a look at your holdings, for the most part, even serious market dips reverse themselves in time. In fact, these bearish blips are regular, expected events, according to Malik S. Lee, CFP® and founder of Atlanta-based Felton & Peel Wealth Management.

So-called market corrections are healthy, he said. “It shows that the market is alive and well.” And even taking major recessions into account, the market’s performance has had an overall upward trend over the past hundred years.

4. Maintain a diverse portfolio

All investing carries risk; it’s possible for some of the companies you invest in to underperform or even fold entirely. But if you diversify your portfolio, you’ll be safeguarded against losing all of your assets when investments don’t go as planned.

By ensuring you’re invested in many different types of securities, you’ll be better prepared to weather stock market corrections. It’s unlikely that all industries and companies will suffer equally or succeed at the same level, so you can hedge your bets by buying some of everything.

5. Consider hiring professional help

Although the internet makes it relatively easy to create a well-researched DIY stock portfolio, if you’re still hesitant to put your money in the market, hiring an investment advisor can help. Even though the use of a professional can’t mitigate all risk of losses, you might feel more comfortable knowing you have an expert in your corner.

How the stock market can grow your wealth

Given the right combination of time, contribution regularity and a little bit of luck, the stock market has the potential to turn even a modest savings into an appreciable nest egg.

Ready to get started investing for yourself? Check out the following MagnifyMoney articles:

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.

Jamie Cattanach
Jamie Cattanach |

Jamie Cattanach is a writer at MagnifyMoney. You can email Jamie here

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