Why it’s never too late to open a brokerage account
Whether you are young or old, employed or retired, it is never too late to open a brokerage account. If you put off saving for retirement when you were younger because the future seemed too far away to worry, now is the time to start. If life has thrown you one ball after another and you’ve never been able to invest, today is your day.
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What is a brokerage account?
A brokerage account is an account that allows you to buy and sell investments. These can include stocks, bonds, REITs, mutual funds, and exchange-traded funds (called ETFs). You open an account through a brokerage firm, which is sort of an intermediary between you and the companies in which you invest.
Let’s say you want to own shares in a specific company. Rather than buying shares directly from that company, the brokerage firm would make the purchase on your behalf. You put money in your account and choose your investment, and they handle the purchase.
Some things to know about brokerage accounts
Before you get started with investing, here are four things to know about the money invested in a brokerage account.
Most brokerage investments are not insured by the federal government
It is possible to lose your investment because brokerage accounts are not FDIC insured. That said, investing is one of the safest ways to make money at the end of the day – as long as you’re smart about it. Diversification is the key. As much as you love a particular business, you don’t want to put all of your financial eggs in one basket. Increasing the number of companies you invest in – and spreading the types of investments you make (for example, stocks versus bonds) – could reduce your risk of loss.
Suppose you invest in several companies, then one of them is going through a rough time and the value of their shares drops. It is not a disaster. In fact, if it seems like the hard times are temporary, buying more of those stocks when the price is low can leave you alone. In the meantime, as one (or two) of your investments struggle, you have other investments to take over.
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Investments are like long term relationships
Even if you are nearing retirement, it helps to know that, like in any long-term relationship, no two days will be the same with your investments. Some days things will be great, and some will make you wonder why you ever got involved. The thing about investments in the United States, however, is that they have a pretty good track record. The investments have worked extremely well over the past couple of years, but even when we look at the historical records, we can see that the investment has paid off.
The S&P 500 is a stock market index that tracks the performance of 500 large companies and serves as a good barometer of market developments. Between 1957 and 2020, the average annual return on stocks was around 11%. Between 2011 and 2020, the yield was 14.5%. There have been years of rising and years of falling, but on average, investors steadily increased their money at a much higher rate than they could hope to earn from a savings or money market account. .
It’s all about compound interest
Let’s say you invest $ 5,000 in a brokerage account and earn 10% interest each year. After one year, you have earned $ 500 in interest. There is now $ 5,500 in your brokerage account and you are starting to earn interest on the interest you have already earned. The following year, you earned an additional $ 550 in interest and your balance increased to $ 6,050, and so on. It is compound interest. As long as you don’t panic and withdraw funds whenever an investment hits a roadblock, compound interest helps your investment grow over time.
You don’t have to be rich to invest
Let’s say you are on a tight budget but can invest an additional $ 100 per month. No amount is too small. While some brokerages require a minimum deposit which may exceed your budget, many online brokers offer accounts with no minimum deposit. No matter how much or how little you have to start, the trick is to jump in.
How to start
Being a new investor doesn’t have to be intimidating. It’s easy to get started and you can develop your investing skills on your own schedule. Here are the first steps to take.
1. Identify your goals for the account
Everyone has a different reason for opening a brokerage account. Some people want to save for retirement or buy a house. Others just want to let their money grow, knowing that they can dip into the funds later. Your personal goals will ultimately help you decide which brokerage firm is right for you.
2. Choose a brokerage firm and apply
Once you’ve chosen a brokerage, complete an application. The process is straightforward and brokerages usually only ask for the information they need to have on hand.
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3. Put money into your new account
Typically, you will link your bank account to the new brokerage account. It is important to note that the brokerage will never access your bank account. The only reason for the link is to simplify the money transfer process when you decide it’s time to do it.
4. Find the investments that interest you
Most brokerages have awesome videos and research material that you can browse at your own pace, and some have representatives who are happy to answer questions.
For more information on getting started, see our step-by-step guide to opening a brokerage account.