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Open A Brokerage Account – Full Guide For New Investors

You can use your brokerage account to invest in variety of assets. How does it work, which factors to take into account and how to open it? Here's our full guide.

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Table of Content

What Is a Brokerage Account?

A brokerage account is like a savings account that you set up exclusively to invest, regardless of what investment option you choose.

You can use your brokerage account to buy stocks, bonds, mutual funds, index funds, exchange-traded funds, foreign currencies, futures, real estate investment trusts, precious metals, cryptocurrencies, and just about anything else that’s out there on the investment market.

Your brokerage account should work like a savings account in the sense that you can take money out of it anytime although it may mean selling some investments or having to pay capital gains taxes.

You can also set up an automatic transfer for it and some banks will let you link it to your checking account.

What Can You Do With a Brokerage Account?

When you open a brokerage account, you can use the account to gain access to different investment opportunities like stocks, mutual funds, bonds, EFTs, among many other types of securities. Besides, you can take part in trades that offer short-term benefits like trading in stocks.

You can invest in portfolios like gold that are long-term oriented. In addition, the account allows you to set aside some money for your retirement alongside other saving plans.

With the introduction of low fee platforms, stock investments have become more commonplace. In this chart using FED Survey of Consumer Finances data, it is clear to see that stock holdings are still dominated by the older age groups.

Under 35s account for an average of $27,000 in stock holdings, while those closer to retirement age and the retired hold over an average of $550,000. This suggests that stocks form an integral part of retirement planning.

Stock Holdings by Age

Savings Account Vs Brokerage Account

However, there’s one major difference between the two. Your savings account enjoys an insurance cover from the Federal Deposit Insurance Company up to $250,000 while your brokerage account has no insurance cover. So, if your investments fail, you can lose all the hard-earned money in your account in a snap.

The different brokerage accounts impose their own opening balance requirements. Some firms will ask for a minimum of $1,000, $2,000, or even more. Others would agree to a smaller amount when you open an account but will require you to deposit money every month automatically from your checking or savings account.

Once your account is ready, you can start buying and selling investments through it. The level of flexibility you can experience will depend on the firm that you choose to work with. And even if your account stays with a brokerage firm, you will own all the assets you will buy through the brokerage account.

What's the Difference Between a Brokerage Account and an IRA?

The main difference between a brokerage account and an IRA is the purpose for which you are opening an account. A brokerage account is an investment account that allows investors to buy and sell financial products such as stocks, bonds, and mutual funds. You can invest in both short-term and long-term investments, but you don’t get the tax incentives available in an IRA.

In this chart using FED Survey of Consumer Finances data, we can see that many people only start serious retirement planning after the age of 35. While under 35s have an average of $30,000 in retirement accounts, this increases significantly in the 35 to 44 age bracket. However, the increase is even more significant between the 45 to 54 age group and the 55 to 64 age group.

Retirement Accounts by Age

An IRA, on the other hand, is a tax-advantaged retirement savings account that allows investors to set aside part of their salary for retirement savings. The money grows tax deferred, meaning you won’t pay tax when you contribute to the account, but you will owe income taxes when you withdraw the money in retirement. Generally, IRAs are suitable for long-term goals.

Classification Brokerage Account Retirement Account Checking Account
Contribution limits Does not restrict investment amount Requires certain eligibility, and there are limits to how much you can contribute. No restrictions on saving amount.
Taxes Taxes are flexible Taxation depends on the choice of your IRA Does not attract taxes
Withdrawal charges Flexible withdrawal depending on your needs. Depending on your IRA account, you can incur penalties when you withdraw earlier than the maturity date No access limit and withdrawals.
Purpose of the account Goal is investment Focuses in long term growth and retirement savings Keeps your money safe
The fees Does not attract maintenance and opening fees Does not attract maintenance and opening fees Can attract monthly maintenance fees

Full-service Broker Vs Discount/Online Brokers

You can choose from several types of brokerage accounts.

The type that you should choose will depend on your investing goals, the kind of portfolio you want to build up and how much help from your broker you’d like in the selection and management of these investments.

  • Full-service Brokers

If you want a close professional connection with a financial advisor from your brokerage company, you should get a full-service brokerage account. The brokerage firm normally bundles with the account an opportunity to consult with in-house experts who can help you choose the instruments, conduct bigger-picture financial planning, look at some tax-saving strategies or just refocus your perspective when you become jittery because of sudden market deterioration.

Of course, it does not come cheap. Most brokerage firms will charge you expensive fees along the way, with some collecting big commissions while others will ask for a certain percentage of your assets on a defined schedule.

  • Discount or Online Brokers

If you are comfortable with a self-service option, you can try an online discount brokerage account. They often charge the lowest fees because when it comes to choosing what investments to buy, they will leave you to decide for yourself.

You might find one or two that give access to advisors or investment research materials, but they won’t be as committed as the ones from your full-service brokerage. It’s a question of fees basically. Since you are not paying for the service, they won’t give you anything beyond your money’s worth.

  • Robo-advisors

If you have the full-service brokers on one end and the discount/online brokers on the other end, you’ll find the Robo-advisors in the middle. A Robo-advisor is an automated platform that can provide you with financial planning services (such as building your investment portfolio) but without the services of a human advisor.

Similar to full-service brokers, Robo-advisors will choose investments for you and conduct trades on your behalf. Since they rely on an algorithm, they can’t fully customize a portfolio to exactly to your requirements.

Account Types: Cash Vs Margin Accounts

As you sign up for a brokerage account, you will have to choose between a cash account or a margin account. The majority of brokerage firms offer two main types of brokerage accounts: a cash account or a margin account.

In a cash account, the investor must first pay the securities in full for each trade. You also cannot borrow money from your broker with this type of account. In a margin account, your brokerage firm will let you borrow money to purchase securities.

However, the securities that you already have in your portfolio will serve as the collateral. And since it’s technically a loan, you will pay interest when you buy securities on margin.

Basically, a cash account is a safer, less expensive choice if you are a new investor. Using margin is quite risky and may expose you to big losses even if you’ve thoroughly analyzed your position. It’s best to go with a cash account at first. Make sure you carefully read your new account application and any other documents that come from your broker regarding margin loan accounts (including the fine prints).

Choosing Your Brokerage Service

If you want to go and get a brokerage account, you’ll have to select which firm to use. There are literally hundreds to choose from and each one has its own set of fees and services, so you need to do some checking.

Be sure to use one that fits your needs. Which means you should do a little bit of research in the company. Before signing up for one, look at these factors:

  • Brokerage Type -If you feel you won’t be able to comfortably traverse the road to your investment goals without a financial coach to guide you along the way, it would be better to consider a full-service broker or a Robo-advisor. If you’re the independent type and feel that you can confidently find your way on your own, then go for a discount/online broker.
  • Minimum Investment – Understandably, when you’re just starting out, your capital won’t be very big. That is not really much of a problem with brokerage companies although some of them do impose a fat minimum balance. If you cannot meet those requirements, they will charge you a penalty or just block you from opening an account with their firm.
  • Customer Experience – If you’re eyeing an online brokerage firm, examine their website. As a user, you want it to be easy to navigate and their portals to be customer-friendly in terms of conducting your trading business.
  • For investors who may not be familiar with the current trends in online technology, good customer experience is of high importance. Many discount/online brokers limit their presence solely in cyberspace. It reduces their cost but often, they sacrifice their level of customer service satisfaction.
  • Your Target Investments –Most brokerage firms would help investors trade and invest in standard securities such as stocks, bonds, and funds but not all of them will let you invest in the more complex ones.
  • Only a handful of brokers will allow you to use your brokerage account to invest in complicated and riskier investments such as penny stocks, foreign currencies or options. If this is the area where you want to operate, look for a brokerage that offers these investments at an acceptable cost.
  • Perks – You may find some larger brokerage firms that give out incentives just for signing up. Sometimes, you can get cash bonuses for opening an account or a couple of free trades. These offers are good is you can make use of them and if the firm is within your radar. But don’t choose a firm just because of its attractive sign-up offers.

Fees

Before you sign up with a brokerage firm, make sure you’ve read and understood their schedule of fees to know how much they charge for their services and when they collect their fees. These fees and other costs have a way of eating into your income and if you’re not conscious of them, they may even consume your principal funds.

Brokerage firms will vary in their fee structure but you’re not going to find one that offers their services entirely for free. We have listed the most common fees below. Again, before you commit to a brokerage firm, you should have a good grasp of their fee structure.

  • Brokerage fee. This is the fee that you pay to maintain your account either annually or monthly. You pay this fee to be able to maintain the brokerage account, have access to premium research or investing data, use of the trading platforms or sometimes, even for inactivity for infrequent trading.
  • Transaction fee. Each time you buy or sell a stock, the firm will charge you a fee. Normally, it is a flat fee, but the amount will differ by firm. The more trades that you make, the higher would be their total. Brokerage firms also collect this fee for mutual fund trades.
  • Management fee. If you get the services of an account manager or a broker, you will have to pay a fee for that maintenance. It is usually a percentage of the total assets that these advisors manage for you. The more hands-on they are on your account, the higher the fee you should pay.

How To Open A Brokerage Account

You want to have a good start on your investment journey and selecting the best brokerage account for you can seem like a tedious process – but it shouldn’t be.

Begin by deciding the type of account that you want and come up with a list of prospects. Then, compare these stockbrokers until you narrow down your list to the one that best meets your needs.

1. Choose The Right Investment Account For You

As we’ve said, there are several types of brokerage accounts. The right one for you will have to align with your investing goals, the kind of investment you intend to buy and how much help you’d like them to give in selecting and managing your investments.

2. Choose Your Broker

When you’re done deciding which type of investment account you want, the next step is to choose an account provider. As you compare the brokers on your shortlist, focus on the features and services that are most important for you (using the guidelines we shared above). For each supplier, determine the pros and cons of your overall objectives, then pick the best overall broker among them.

3. Gather The Information

If it’s about money, expect huge paperwork to be present. The SEC requires brokerages to keep a record of customer names, addresses, social security numbers, and birth dates. They will also ask for your bank account information and bank routing numbers. Some brokerage firms will as for more documents than other brokers.

4. Fill Out The Account Application

You can do your new account application online. Of course, the broker will require your present some identification such as your Social Security number and driver’s license.

Of course, if you’re going to request some additional features such as margin privileges or the ability to trade options, there will be other forms to fill out. The broker would be likely to get information about your net worth, employment status, investable assets, and investment objectives.

5. Fund The Account

When the broker approves your account, your first responsibility is to fund it. Brokerage firms would usually have several options available for you to put money into your account.

Some of the common ways to transfer money from your bank into your brokerage account include electronic fund transfer, wire transfer, via check deposit, transfer an existing investment from another account or broker, or thru deposit of an existing paper stock certificate.

6. Research Investments

You should invest some time learning about the essentials of stock, bond and fund selection plus how to create a balanced and diversified portfolio. When you log in to your account and see all those attractive offers, it’s tempting to just go wild and click here and there. But try to remember that slow and steady is the key – there’s no need to rush but you should study the available options well.

7. Go for it but start with low amounts

At last, you’re ready to make your first purchase through your investment account so, go for it. After you have done this, continue doing research and buy investments to build up your portfolio and grow your account.

Can You Lose Money in a Brokerage Account?

It is improbable that you will lose money in a brokerage account since every brokerage has to be a member of the Security Investor Protection Corporation (SIPC), which offers a custodial function cover to brokerages. As a result, your cash and securities in a brokerage account are secure. That means, in case your brokerage faces bankruptcy, SIPC cover will help you recover your investment.

However, there are two caveats. For individual SIPC customers, it provides coverage protection for up to $500,000 of missing brokerage funds, including cash of $250,000. However, SIPC does not cover losses you incur out of bad investment advisory or poor investment decisions, or even value degradation of your securities.

Bottom Line

The most important factor to consider as you choose a brokerage account is whether it will let you do everything that you want with your investments in a way that’s easy, efficient and problem-free for you. The best brokers will have your satisfaction in mind by offering you the support you need without being invasive and gives you value for money.

The good news is that many financial providers offer brokerage accounts and your chance of finding the perfect fit is extremely high. In a short time, you’ll be able to select a broker whose offers meet your particular needs right down to the last item and the two of you can work together to accomplish your own financial and investment objectives

FAQs

You can keep the uninvested cash in a brokerage sweep accounts for added convenience.  For instance, when you receive some dividends, the brokerage will swiftly move the funds to a settlement fund like a cash management fund or a money market mutual fund, depending on your setup.

However, you should treat brokerage sweep accounts as a short term solution. In comparison to real investment, brokerage sweep accounts earn dwarfish commissions. In the long run, your money value may depreciate in value due to inflation. 

To solve this puzzle, you have to differentiate between margin and cash accounts. 

In a cash account, you trade within the bounds of your cash. As such, it is impossible to lose your money beyond your investment. Therefore, your risks are considerably low, and you can continue holding your stocks until you decide to liquidate. However, you can’t short sell your stock and your sales are tied up till the trade settles. 

Margin accounts, in contrast, allow you to trade on margins. You can borrow up to 50% of your account value. As such, you get more purchasing power. This equates to a high potential for magnified returns. However, when you lose, losses can spill beyond your investment. Besides, it attracts higher interest charges, so does your exposure to risks. Unlike in a cash account, the margin account broker can force you to sell securities if the margin falls below the allowed limit.

It can take about 3 days to liquidate a brokerage account. However, once the broker receives the funds, it may take an additional processing period of 2 to 3 days. That makes it a total of 5 – 6 days. You have the option of arranging with your brokerage to make a wire transfer directly to your bank account.

Occasionally, your money will reflect in your account within a day. Although it is quick, it attracts some extra charges that eat into your money. Therefore, you’ll have to weigh whether you can accommodate the additional fees for a shorter waiting time. These guidelines are known as T+3 settlement and they are provided by the Securities and Exchange Commission.

You can transfer money from an IRA to a brokerage account. The transfer will not incur penalties as long as the transaction goes to a similar retirement account or a brokerage account.

You should opt for a direct trustee-to-trustee transfer to avoid taxes. If the transfer is made direct to you, it could trigger taxes if you don’t complete the rollover within a 60-day period. In addition, you can make only one transfer within a 12-months.