How to open a brokerage account and start investing – Fortune

The idea of opening an investment account can be intimidating, especially if you’ve never done it before. 

Investment accounts, or more specifically brokerage accounts, are used to buy and sell investments such as stocks and bonds. These types of accounts are designed to allow individuals to invest in the stock market without the limitations often associated with other types of accounts, such as retirement accounts that come with withdrawal and contribution restrictions. And when managed wisely, brokerage accounts can be a valuable way to invest for short, medium, and long-term financial goals.

Steps to open an account 

There are many factors to consider as you prepare to open an investment account including deciding what type of investor you want to be and which brokerage firm is the best match for your needs and financial goals, and not to be overlooked, it’s important to understand the fees associated with brokerage accounts. 

1. Choose the type of investment account you want

Identifying the right brokerage account for you will depend largely on your financial objectives and how actively—or not—you plan to manage your investments. Here are two big questions you can ask yourself as you’re comparing accounts to try and pick the right one:

What are your goals for the money?

It’s not unusual for investors to use brokerage accounts to bolster retirement savings in 401ks or IRAs, meaning the brokerage account is being used for long-term financial goals, such as retirement. In other cases, brokerage accounts are established to help fund short-term or medium-term financial needs, such as paying college tuition for children or to cover the costs of a wedding.

“Which account type to choose will depend on your situation and what you are investing for. Talking to a financial planner, or tax advisor can be helpful if you have no clue how to decide,” says Corbin Blackwell Donahue, a senior financial planner at Betterment, a financial advisory company providing digital investment and cash management services.

Investment accounts are also used simply to grow money by those who are willing to take on some risk in order to achieve more aggressive financial gains.

“Unlike savings or checking accounts which are your everyday bank accounts that pay a steady but small amount of interest, investment accounts can help you generate significant wealth over time if you invest in a prudent manner,” says Blackwell Donahue. 

What type of investor do you want to be? Hands on or hands off?

For some investors, there’s nothing more satisfying than monitoring investments closely and being engaged in the day-to-day decision-making of buying and selling. While for others, that type of approach is simply not practical or appealing. Deciding which category you fall into is another important consideration.

If you intend to be more hands-on, then a robo-advisor platform, which allows for largely managing investments yourself with some minimal guidance, may be more suitable. These types of services often provide suggested investment portfolios based on your general preferences and input. Some of the well-known platforms in this space include SoFi Automated Investing, Betterment, and Vanguard Digital Advisor, to name a few.

If however, you prefer to have the heavy lifting handled by investing professionals, then a full-service brokerage firm may be a better choice. Firms such as Edward Jones, Fidelity, Morgan Stanley, Vanguard and more offer full-service accounts. When opening an account with a full-service firm, you will typically have an advisor who actively manages your investments, including all trades, and provides individualized guidance and advice.

“Investors have a lot of options these days—they can use a financial advisor or robo advisor, they can open a brokerage account and invest on their own, or they can create a hybrid approach,” says Jon Klaff, general manager at Magnifi, a digital investing platform. “You can be hands on or hands off with any of these approaches–I think the question is really about how you want to spend your time and your money.”

A financial advisor might charge you 1% of your portfolio,  but if the peace of mind and time savings is worth it to you, then that is a good investment, adds Klaff. “If you have the interest and confidence to invest on your own, then that 1% is better spent in the market.”

2. Compare fees, pricing schedules, and minimum balance requirements

No matter which type of account you’re considering, there may be minimum balance requirements, fees, and other pricing schedules to be aware of as you decide how to proceed.

No minimum balances
Some brokerage accounts have no minimum balance requirements to get started, which can be a benefit if you want to start conservatively. 

“Most of the larger custodians do not require a minimum investment to open an account,” says Tom Koleski, certified financial planner, AIF, and head of financial planning at Cedar Capital, an investment management and income planning advisory firm. 

Still others may require thousands of dollars in order to work with a particular advisor or firm or to access a specific type of brokerage account.  

Commission-free trading

Commissions are fees charged by a brokerage each time a stock or other investment is bought or sold. They’re essentially the cost you are paying for a service. Some brokerages charge a flat fee for such services, while others charge a percentage of the transaction, such as 1%. 

Commission-free trading, on the other hand, you will not be charged a fee for buying or selling stocks or other types of investment. Fees can quickly add up, especially if you plan to be an active trader, so be sure to read the fine print and consider them carefully as you decide on an account.

Additional fees

There’s often many other types of fees associated with brokerage or investment accounts, so it’s important to read the fine print. Some of the fees you might be charged include annual maintenance fees, monthly maintenance fees, inactivity fees, transfer fees, and research fees.

Some accounts are known for being less fee intensive, which makes shopping around an important part of the process, as these fees can begin to cut into the money you are earning by investing.

Fractional investing options

Fractional investing involves buying a portion of a whole share. For example, if one share of a particular company is worth $1,000 per share, you can buy half of a share for $500. Buying fractional shares  allows investors who have smaller amounts of money available to buy less than one whole share of a stock or security. This type of investing can also be a good way to get started if you’re new to investing.

Many brokers and robo platforms allow for fractional investing, but not all of them. It’s a good idea to ask about or look for this option as you’re considering where to open a brokerage account.

3. Review account services offered

The services offered in association with your investment account are another important factor. Accounts that include such features as investment research or easily accessible mobile trading features, can make your investment experience more successful and convenient.

Investment research and stock ratings

Many platforms these days offer a full online library of educational investment articles and regularly updated information about market trends and developments. Often this information is free if you open an account with a particular platform or brokerage. If you’re new to investing or simply like to stay on top of the market movements, this can be an invaluable benefit. 

Foreign trading options

If you plan to invest in global stocks or mutual funds, it’s important to find out whether the brokerage account you’re considering provides access to this type of buying and trading. Not all do. Some may offer more limited options in terms of the foreign stocks or investments you’re able to access or in some cases you may be required to go through an international broker.

Mobile trading

Most companies these days have a mobile app from which you can monitor your account and investments, make trades and more. If this is important to you, be sure to find out whether the platform you’re considering offers this feature.

4. Complete application

Once you’ve decided on the brokerage company or platform that best suits your financial goals and needs, it’s time to complete an application to open the account. While this step is typically quick and easy, you will be required to provide a variety of personal information and documentation.

This often includes:

  • Your name
  • Social Security number
  • Address and telephone number
  • Email address
  • Date of birth
  • Driver’s license, passport or some other official, government identification
  • Employment status and occupation 

In some cases you may also be required to provide such information as your net worth, annual income, and details about your investment goals and risk tolerance.

5. Deposit funds into the account

There are typically many different options for providing initial funding for your brokerage account. This usually includes wire transfers, or an electronic transfer from another linked bank account. You may also be able to simply mail a check to the brokerage firm.

Once the funds have arrived in the account you can begin buying stocks and other assets and making trades either on your own or through your advisor.

Other ways to invest 

While brokerage accounts can be a great way to invest freely and build wealth, they’re not the only option. There are many other types of investment accounts designed for specific needs and phases of life.

Retirement accounts
Personal investment accounts tailored toward building a retirement nest egg are another important option. The most well-known of these are Individual Retirement Accounts(IRAs.) There are two primary types of IRAs: traditional and Roth. These accounts allow users to set aside money on their own in a tax advantaged way.

“Unlike a traditional brokerage account, IRAs offer tax benefits that are hard to find elsewhere when it comes to retirement savings,” says Koleski.

Using a traditional IRA, you can contribute money untaxed and won’t pay taxes on any interest or gains earned in the account until you take the money out. In addition, when you contribute money to these accounts each year, you may earn a deduction on your annual income taxes. You’ll be required to begin making withdrawals at age 72.

Using Roth IRAs, you contribute after-tax dollars, and as a result when you withdraw money from the account during retirement, there are no taxes to be paid. In addition, the earnings in a Roth account are not taxed.

The important point to understand about these accounts however, is that the money is intended for your retirement years, rather than more short-term goals.

“These are awesome vehicles for investing for retirement, but not as great if you are trying to put away money to buy a new car next year for example,” says Blackwell Donahue. 

Education accounts 

With the skyrocketing cost of college in this country, preparing for college tuition costs is another important use for investment accounts. 529 accounts are specifically designed to help families with this goal. 

Account holders can make after-tax contributions to these accounts and invest the cash in mutual funds, ETFs or other similar types of investments. The concept behind the accounts is that money in a 529 plan grows as your child grows and can later be withdrawn to cover education-related costs. However, the money can only be used for qualified, education-related expenses such as tuition or books.

“529 plans are state sponsored education accounts,” says Blackwell Donahue. “They are great if you know you want to save for your kid’s college education, but if you need the money to buy a house for example, I would avoid using a 529.”

Investment accounts for kids

Investment accounts created to benefit your children are referred to as custodial brokerage accounts. Similar to traditional brokerage accounts, you can use this type of account to invest freely in a variety of options including stocks and bonds.

The main difference is that the account is set up in the minor’s name, with an adult administering setup and management of the account. If you’re considering this type of account it’s important to know that the account is irrevocable, meaning it legally belongs to the child.

“Custodial brokerage accounts are similar to traditional brokerage accounts in that they are easy to set up and provide investors with a variety of investment options,” says Koleski. “They typically offer more investment options and greater flexibility when compared to 529 plans and can be a great way to save money for a minor’s future.”

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