How to open a brokerage account – Forbes Advisor
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Opening a brokerage account can seem like a daunting process, but it doesn’t have to be. Before you begin, you should understand the types of brokerage accounts available and the features that are most important to your investment goals.
“What are you trying to accomplish with the account?” What are you looking to exchange? Some custodians will be better suited for certain types of things, âsays Charles Failla, chartered financial planner with the Sovereign Financial Group in New York.
Let’s take a closer look at brokerage accounts and what you need to choose the right account for your investing needs.
What is a brokerage account?
A brokerage account is an account that you can use to buy and hold investments, such as stocks, bonds, exchange-traded funds (ETFs), and mutual funds. When you open a brokerage account with a brokerage firm, the brokerage firm buys and sells investment assets in the market on your behalf. The firm is also the custodian of the securities you hold in your brokerage account.
There are two types of brokerage accounts: taxable investment accounts and retirement accounts. You can open both types with a brokerage firm, but the investments you hold in either account are separate for tax purposes.
With a taxable brokerage account, you pay regular income tax and capital gains tax on dividends, interest, and gains on the sale of your investments. You can deposit as much or as little money into your taxable brokerage account as you want. Check out our roundup of the best online brokerage accounts.
With a retirement account, you deposit money into a traditional individual retirement account (IRA) or a Roth IRA. If you are self-employed, you can choose to open a Solo 401 (k) or a SEP IRA. These plans all have different rules regarding taxes and contribution limits that you need to understand. They also have rules regarding who is qualified to open and contribute to such accounts.
Cash brokerage account vs margin account
Taxable brokerage accounts come in two forms: cash accounts and margin accounts. With a cash account, you buy investments with the money you have deposited into the account. If you have $ 500 in the account, you can buy securities for $ 500, and no more.
A margin account allows you to borrow money from the brokerage house to leverage your investments. Some investors use margin accounts to execute more complex trading strategies.
âBuying on marginâ means that you have borrowed money to buy investments. You pay interest on the loan, and the investments you buy serve as collateral. Additionally, you need a margin account to make short sales.
There are risks associated with using debt in your trading strategy. If the market goes down and investments bought on margin lose too much value, the brokerage may ask you to pay off your debt immediately, this is called a âmargin callâ. The brokerage may also sell your investments to cover an account deficit without notifying you in advance.
If you want to buy and hold stocks, bonds, or ETFs, a cash account is all you need. âFor anyone just starting out, I think the margin is just a way to get into trouble quickly,â says Michelle Fait, Certified Financial Planner at Satori Financial in Seattle. “I think most investors would do better with railings, and we all know debt can get you in trouble if you don’t know how to use it.”
Brokerage account fees and commissions
Many brokerage accounts today tout their trades at $ 0, but keep in mind that this doesn’t mean that all trades are free. There are other costs and fees involved beyond commissions, and you should understand the other fees and expenses charged by your brokerage. This is especially true if you are planning to embark on investments such as options or mutual funds.
Take Fidelity, one of the leading online brokerage firms. Fidelity does not charge any commission for trading stocks, options and ETFs. However, Fidelity charges a fee of $ 0.65 for each option contract transaction, and $ 1 per bond or CD in secondary market transactions. When considering a brokerage account, research the fee schedule and understand the costs associated with different types of transactions.
Some brokerage firms may also offer you incentives to open an account. While that’s not the only thing you should consider when comparing companies, if you’re reduced to two mostly identical choices, a good onboarding incentive can tip the scales. For example, in May 2020, E-Trade and Ally Invest offered new investors a bonus of $ 50 if they deposit between $ 10,000 and $ 24,999 in new money.
Brokerage account vs. Robo-advisor
If you are a newbie investor, consider carefully whether a robot advisor might serve your needs better than a brokerage account. Robo-advisers use investment algorithms to suggest a portfolio that matches your needs, and then manage the portfolio for you, charging an annual fee for the service.
When you open an account with a robo-advisor, the platform asks you a series of questions about your investment goals, time horizon and risk tolerance. Depending on these factors, the robo-advisor offers one or more investment portfolios, generally made up of low-cost ETFs.
If you think you need more investment advice, a robot advisor might be a good option. The robo-advisor annual fee can be 0.25% or more of your portfolio value, and you may also need to pay expense ratios for ETFs.
âRobots can be an option for people who know they need to invest, but they really don’t want to be involved that much,â says Fait. If you are looking to play a more practical role in building your investment portfolio, choose a brokerage account.
Brokerage account features
Fees are a big factor in choosing a brokerage account, but they aren’t everything. Consider these key characteristics when choosing a brokerage account:
- Technology: How is the company’s website? How is the app? Browse the website and consider downloading the app to see how easy it is to use. âWhat does their interface look like? Said Failla. “I’m sure they’re all pretty good so it’s more a matter of preference.”
- Education: What types of resources does the company offer? Are there educational articles? Do you want advice and do they offer it? Do they offer webinars or other tutorials? If you are looking to learn more about investing, you may want a brokerage firm with some âInvest 101â offers.
- To research: If you are a more advanced investor, you may want more research and analysis tools. Some brokerage firms offer detailed analyst ratings, as well as access to third-party research and filters to help you choose from the many investment options out there.
- Familiarity: Do you already have an account there, like your employer’s 401 (k)? âDo you have an account with a large company and do you like this platform? Â»Fact said. “With the idea of ââwanting people to have it as simple and transparent as possible, if they’re already online at a brokerage, that could be a good place to start.”
- Exclusive fund options: Many large companies offer their own exclusive low-cost or no-charge mutual funds and ETFs as investment options. If you have an eye on someone’s household fund family, it can make a difference. âI generally recommend Fidelity or Vanguard because I think the fund families that come with them offer good choices across the board for passive investing, in terms of index funds or sector investing,â says Fait.
- Availability of branches: If you’re comfortable with an online-only experience, that’s fine. But some people, especially young investors, may want a business with branches they can visit if they need additional help or insight.
How to request a brokerage account
Applying for a brokerage account is easy. âYou can do it in 10 minutes these days,â says Failla. “It’s really quite simple.” You will typically need to provide the following information:
- Your social security number
- Other personal information, including your telephone number and personal address
- The name and address of your employer, if you are an employee
- Your annual income and personal net worth
You may need to answer other questions to verify your identity. You may also need to select a âcore positionâ or an account that will hold your money until you invest it, such as a money market fund or an interest-bearing treasury account. You can change this selection after opening the account.
How to fund your brokerage account
You can open a brokerage account without immediately funding it during the application process. When you decide to fund the account, the brokerage will ask you to link a checking or savings account to your brokerage account, or give you the option to transfer funds to your account. You can also transfer a balance from another brokerage account if you change companies.
Once you’ve funded your account, choose the investments accordingly. What you invest in will depend on your time horizon and your goals. If your business offers educational tools, use them to inform your investment choice. There are no limits to how much you can invest in a traditional taxable brokerage account, but if you have questions about which investments are right for you or how tax treatment works, a financial advisor can help.