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You know it’s important to be investing, but getting started has you stumped.
What type of account is right for you? Where should you go? How much money do you need?
It’s time for a deep dive into brokerage accounts.
Opening a brokerage account is a fairly painless process. For the sake of research, I recently opened an entirely new account to simulate the experience and walk you through the process, which takes about 15 minutes.
What Is a Brokerage Account?
First things first: A brokerage account is sort of like a checking account for your investments. By that I mean it’s a place to hold your money; it’s where you deposit the money you want to invest. A brokerage firm is generally the company that does the buying and selling on your behalf. Names like Fidelity, Vanguard, Charles Schwab, TD Ameritrade, and E*Trade might ring a bell. These are brokerage firms with which you can set up a brokerage account.
I’ll be describing how to open a brokerage account with a traditional brokerage. There are other options too, like micro-investing apps or dedicated robo-advisors such as Wealthfront, WealthSimple, or Betterment. And many brokerages like Fidelity, Vanguard, Charles Schwab, and others offer their own version of a robo-advisor.
Deciding Which Type of Account Is Right for You
There are many different types of brokerage accounts depending on your wants and needs. The categories from which you can choose are:
Retirement: IRA or 401(k)
Good for: Preparing a nest egg for your future self. Plus, they’re tax-advantaged accounts.
Investing/trading: Index funds, individual stocks, ETFs, bonds, etc.
Good for: Growing your money for medium or long-term goals that are five or more years away.
Saving for education: 529 college savings plan
Good for: Investing to grow your money for your child’s education in a tax-advantaged account.
Managed accounts: Human advisor or brokerage-specific robo-advisor
Good for: The investor who sees value in paying more for some hand-holding and specific advice.
Why Are You Investing?
The account you choose depends on your why. Are you investing for retirement and therefore need an IRA or perhaps Solo 401(k)? Are you laying the foundation for a child’s future college education in a 529 account?
Maybe you’re interested in using a taxable brokerage account and buying stocks, bonds, ETFs or index funds for other financial goals. A taxable brokerage account doesn’t give you the same tax advantages as a retirement account, but there is more flexibility on when you can sell your investments and use the money. That makes taxable brokerage accounts ideal for medium-term financial goals compared to ones like retirement that may be decades away.
Or, perhaps you’re seeking a little guidance, so you want a managed account either with a human or robo-advisor.
I already have a SEP IRA set up for retirement, don’t have kids, and currently don’t need an actively managed account, so I chose to open an investing/trading account.
If you’re a new investor, it can be valuable to pay a little extra to have a managed account. Most commonly, you would get charged an Assets Under Management or “AUM” fee, which is often around one percent. One percent of a $100,000 portfolio means you’re paying $1,000 to the advisor for his or her services.
How to Open a Brokerage Account
To open your own brokerage account, you need to be at least 18 years old, have a Social Security number (or Individual Taxpayer Identification Number), and money to fund the account.
Opening a brokerage account today is easier than ever and probably won’t take longer than 15 minutes of your time.
Do You Want an Individual or Joint Account
Simply put: Are you sharing this account? Typically, this would make sense for spouses. My husband and I don’t have a joint brokerage account, so I went ahead and selected yes to “joint.” This prompted a new question: “Joint with rights of survivorship” or “Tenants in Common”?
What the heck?! After a bit of research I found that “joint with rights of survivorship” means if I die my husband would assume total control of the account, and vice versa. Regarding “Tenants in Common,” my 50% ownership would go to an estate after I died, and vice versa.
You’ll also be asked some identity verification questions, and then move on to picking your account settings.
How Do You Want Your Cash to Be Held
Don’t worry, this isn’t actually picking your investments quite yet. First, you need to determine how you want your cash to be held. You’ll have an account in which cash will sit idle. This could be because you’ve recently sold an investment or it’s cash you keep on hand to make investments. You can also fund your investments with a transfer from your bank account, but if you’re interested in making timely investments, then you may want to keep some cash in reserve with the brokerage.
Each brokerage has a different term for where you keep your idle cash, but some examples are “Core position” or “Settlement fund.” These accounts are usually a money market fund and some brokerages just default you into one and don’t provide multiple options — so don’t fret if your process skips this step.
How to Get Money Into Your Account
Once you’re all set up, it’s time to actually get money into your brokerage account. You can link one of your current checking accounts to your brokerage account so you can transfer money over. It often takes a couple of days to verify your checking account. Usually this happens by the brokerage making two small deposits (like 13 cents and 25 cents), which it then takes back, and you confirm you own the checking account by verifying to the brokerage how much it deposited into your account.
You then move money into your settlement fund or directly into the first investment you want to pick.
How to Pick Investments in a Brokerage Account
The final step in opening your brokerage account is to pick your investments. This can be the most intimidating part of the entire process because you’re making a decision about how to put your hard-earned money into the market.
Unfortunately, I can’t guide you on what works best for your situation, but generally index funds and ETFs are a good way for novice investors to get their feet wet.
You might have opened up the brokerage account with particular investments in mind (like a certain index fund or ETF) or perhaps there’s a sustainable initiative you want to support with your investing, like clean energy or women-owned businesses.
Just be mindful that some investments may require a “minimum initial investment.” This means that you need a certain amount of money to fund the investment. For example, investing in a particular index fund might require a minimum initial investment of $3,000. That means you need to invest at least $3,000 initially in order to gain access to the fund. Moving forward, you won’t have to keep depositing $3,000 each time you want to invest.
Don’t let the minimum initial investment freak you out, because there are plenty of fund options that don’t require any minimum initial investment at all. Even if you’re aiming to buy individual stocks, you could look for brokerages that offer fractional share investing because it can be pretty pricey to buy a full share of some companies. A fractional share is essentially owning a small piece of a stock — sort of like taking just a bite out of a piece of cake instead of eating the entire slice. There are stocks that cost thousands of dollars for a single share, so if that’s the stock you want and you can’t afford a full share, you can buy a fractional share.
Finally, as you embark on this journey, it’s always good to vet your options and compare costs of different brokerages as well as the performance of their funds. Morningstar is one of the easiest ways to compare all your investing options.
Investing is one of the most strategic ways to build your wealth. Saving alone is a tough way to achieve your financial dreams and freedom, so let your money go to work for you.