5 things to know before opening a brokerage account
Here’s what you need to know before opening an account with a broker.
The week ending January 29 was an interesting one for financial markets.
Companies long seen as on the brink of failure, such as GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC), saw their stock prices soar as smaller traders launched a short squeeze aimed at to wreak havoc for hedge funds with big shorts. posts.
As institutional investors lost billions and GameStop recorded a 1640% increase in its share value, some brokerage firms responded by imposing new limits on investing in GME and similar companies, even banning traders to acquire new shares.
The actions of these brokers led to legal action against Robinhood; prompted lawmakers on both sides of the aisle to call for an investigation; and left many people wondering if their current broker is really the right one.
While the GameStop phenomenon is unusual, issues with brokerage firms can be all too common. For those looking to avoid investing with a broker they end up unhappy with, there are five things you need to know before deciding who to open an account with.
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1. What is the minimum amount to open an account?
The GameStop phenomenon is widely seen as a David vs. Goliath situation, with retail investors serving as David to the hedge fund’s Goliath.
For now, it looks like the small investor has dealt a blow to Wall Street insiders – although it remains to be seen whether those who made a profit on paper end up keeping their gains at the end of the GME run.
Small investors have been able to achieve this, in part because there are more of them than ever before – and that’s because brokers have begun to break down barriers to investing. One such hurdle is high account minimums.
Ultimately, you shouldn’t need tens of thousands of dollars to start investing, so look for a broker with no minimum balance requirement.
2. Can you buy fractional shares?
As GameStop’s price skyrocketed, many small investors became interested in getting in on the action – but the shares were trading at a few hundred dollars apiece.
Although buying GME during all this frantic trading is a very high risk endeavor, it is not uncommon for individuals to feel priced out of the stock purchases they wish to make due to the high prices. per share.
This is why it is so important to choose a broker that allows the purchase of fractional shares. Fractional shares are fractions of shares that you can buy by specifying the amount of money you want to invest in a particular company. They weren’t available before because you had to buy at least a full share of any company you wanted to invest in.
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With fractional shares, if GameStop was trading at $300 per share and you only wanted to bet $100 of your money on that risky Reddit hug, you could specify that you wanted to make a purchase of $100 and not buy only one-third of a share.
Or, if you were looking to make a smarter and safer investment, you could also choose to buy fractional shares of companies that you would want to own for the long term and would otherwise be deprived of prices, including perhaps Amazon. , Apple, Tesla or Alphabet (parent company of Google).
3. What commissions will you pay?
The GameStop phenomenon was also driven, in part, by the democratization of investing by online brokers which eliminated some of the traditional fees that investors must pay. Specifically, while investors once had to pay a commission of around $5 to $10 each time they wanted to buy or sell stocks, most brokerages have eliminated that cost.
It makes no sense to buy a small fraction of a stock, or even invest a small amount in full stocks, if you are going to lose so much money in commission fees. So make sure the broker you work with doesn’t just charge you for buying and selling stocks.
Brokers To do sometimes charge commissions for certain asset purchases, such as trading options. If you’re considering investing beyond buying stocks, learn about all commission charges that may apply.
4. How often does the broker have breakdowns?
Traders were outraged when Robinhood and other brokers temporarily halted the ability to trade GME shares.
This ban on buying shares, however, was an unusual event. Unfortunately, with some brokers, a more mundane problem regularly affects their users’ ability to trade at will in their account: their applications are unstable and there is a lot of downtime.
Although you should buy and hold for the long term if you want to minimize risk, you still don’t want to be unable to buy or sell stocks because your broker’s website isn’t working. So, before signing up with a broker, check how often their trading platform has dropped over the past few months.
5. What is the reputation of the broker?
Some brokerages, such as Robinhood, are known to encourage active trading among young and sometimes inexperienced investors. Others have different reputations (Vanguard, for example, is known for its wealth in mutual funds).
Consider how you plan to invest and how your brokerage will support this. If you want a lot of investor education, for example, look for a well-known broker to offer that. Or if you’re tempted to jump on the YOLO theory of investing (which isn’t the best way to build long-term wealth), you might want to avoid the apps that fuel this trend.
Ultimately, by considering what a broker is known for, how much they will charge you, and whether they have a solid reputation for reliable service, you can make the right choice of who to invest your money with. Of course, you’ll also need to make smart investment choices once your account is open, which likely means avoiding GME stocks, at least for now.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. christy bieber has no position in the stocks mentioned. The Motley Fool owns shares and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple and Tesla and recommends the following options: January 2022 long calls at $1920 on Amazon and January 2022 short calls at $1940 on Amazon. The Motley Fool has a disclosure policy.
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