If you want to invest money beyond what you can save in a 401(k) or Roth IRA, you’ll likely need to open a brokerage account. This type of account allows you to trade investments, but there are many factors to consider before opening an account.
Choosing a Broker
The type of brokerage you choose will determine the options available to you and the level of service you will receive. There are two types of securities brokers: full-service brokers and discount brokers.
Full-Service Brokers vs. Discount Brokers
Full-service or traditional brokers work closely with you, answering your phone calls and questions, executing your trades on your behalf, and even recommending investments. They may provide you with reports on your portfolio’s performance. They may also be able to give you access to exclusive high-end funds that you cannot access normally.
Full-service brokers charge you a commission for their services, making this option significantly more expensive than discount brokers. These fees generate substantial profits for the brokers. While a commission of $250 is reasonable for investors buying high-value stocks in blocks worth $500,000, such fees can significantly affect your returns if you have a smaller account.
Some traditional brokerage firms operate under mixed compensation models that combine fixed fees, annual fees as a percentage of assets, and trading commissions. These costs often include additional services and will vary from broker to broker.
A discount broker, on the other hand, provides you with the tools to execute your own trades. You handle the buy and sell orders. There’s no one standing between you and your money, which can be convenient if you’re in a hurry. On the other hand, there’s no one to prevent you from taking risky steps, such as selling in a panic or buying on margin during a boom.
For professional or experienced investors managing their own money, discount brokers are the ideal choice, as investors won’t have to pay for services they do not need.
Some brokerage firms offer both traditional brokerage accounts and discount brokerage accounts to investors, allowing them to choose the type that works best for them.
Margin Account vs. Cash Account
In addition to types of brokers, there are two types of accounts you can have at a broker: margin accounts and cash accounts.
Margin accounts allow you to borrow funds to make a trade. Cash accounts require you to have the trading amount available in cash before making the trade. Buying stocks on margin exposes you to risks.
If you intend to trade on margin, you may want to know how the brokerage account organizes its margin terms (for example, some stock traders prefer a more advanced type of margin account known as a “portfolio margin account” in their brokerage account) and the interest rate at which margin loans are extended.
After the financial crisis of 2008, many experts are concerned that re-hypothecation (using loans as collateral for other loans) could turn into a disaster under the wrong conditions. Opening a cash account eliminates this risk.
Minimum Brokerage Account
Minimum opening balance requirements for brokerage accounts vary from broker to broker. Some brokerage firms may set a minimum of $1,000, $2,000, or more. Others may allow you to open an account with less money as long as you agree to deposit funds regularly, often on a monthly basis, from a linked checking or savings account.
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Recently, many brokers require a minimum deposit at all. For example, Charles Schwab does not require any minimum account balance or opening balance. If you cannot maintain the minimum opening balance or any other minimum balance requirements, be sure to consider the fees you might incur.
Account Brokerage Services, Perks, and Tools
You will encounter a wide range of perks and research tools depending on the broker. Some offer free access to stock and mutual fund research data from Morningstar, Thomson Reuters, Standard & Poor’s, Credit Suisse, and other institutions like investment banks.
Others have deals with major credit card companies to provide offers not available to the general public. For example, American Express and Charles Schwab teamed up to allow cardholders to earn benefits based on the size of their total brokerage account, including cash rewards deposited into the linked brokerage account.
Some brokerage firms will also help you invest commission-free in certain securities, such as exclusive mutual funds. For small investors working with a tight budget, this can be a great way to save money.
Will You Use the App or the Website?
If you plan to do a lot of research or trading online, be sure to check out the websites of the brokers you’re considering. The feel and ease of use of the site will be almost as important as the other benefits and services offered.
Some brokerage firms have gained a bad reputation for website outages during periods of high market volatility or trading. Others send some brokerage account holders through a maze of recorded messages before reaching a live person on the phone.
If you are more of an app user, make sure that the brokerage app is compatible with your device and is convenient and comfortable to use.
What to Expect After Opening Your Brokerage Account
Once your account is opened, you can expect to start receiving your account statements. You may receive paper statements by mail or electronic statements, or both.
You can also view trade confirmations for your brokerage account. This allows you to ensure that trades are being executed as you intended, and gives you the chance to correct any mistakes if they occur.
Frequently Asked Questions (FAQs)
Can you open a brokerage account with $100?
Yes, and in some cases, you can start with less than $100. Of course, opening an account and using it are two different things, but you can start with $100.
What is the difference between a brokerage account and a robo-advisor?
A robo-advisor is available with some brokerage accounts. Robo-advisors allow you to engage in automated trading, making investment decisions on your behalf based on the guidelines you set.
Is my money safe in a brokerage account?
Money and some securities in a brokerage account are insured up to $500,000 by the Securities Investor Protection Corporation (SIPC). This includes $250,000 protection for cash in your brokerage account.
Source: https://www.thebalancemoney.com:443/before-you-open-a-brokerage-account-357405
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