Once you have decided to start investing your money, you will next need to figure out the best vehicle for it. One option is a brokerage account, which allows you to purchase stocks, mutual funds, bonds, and other securities using the money deposited in the account.
There are several different brokerage firms, all charging variable rates and offering a wide range of types of services. Importantly, these accounts are taxable, unlike retirement investment accounts, such as an employer-sponsored 401(k). Most firms will not charge a fee to open an account, but you will pay a commission on the transactions that you order. Brokers will offer different types of securities, and some have complex investments like futures and options.
With any brokerage firm, you can open an account online in a matter of seconds, and transfer funds from a checking or savings account in a handful of days. Once the account is open, you can also transfer money from a brokerage account to others if you want to change firms or move cash. You have complete ownership over both the investments and the cash in your brokerage account, so you can make withdrawals or sell securities whenever you wish; the broker simply acts as a sort of intermediary between you and the investments that you want to buy.
For the most part, brokerages have an online system for purchasing investments. Unlike with retirement accounts, there are no rules governing how much someone can deposit or the number of brokerage accounts they can have open.
Understanding the Different Varieties of Brokerage Firms
Because there are so many different types of brokerage accounts, it is important to understand the options before deciding which is the best for you. The simplest option is the online brokerage account, which makes it easy to purchase and manage investments on your own. Many discount brokers provide a full range of investments while charging rather little for commissions since there are few other bells and whistles. If you want less control over your investments, you may prefer a managed brokerage account, which comes with an investment manager. Sometimes, this manager is an actual person who will make suggestions based on your personal preferences and risk tolerance, but you can also opt for a robo-advisor, which uses algorithms to choose and manage investment—and is much cheaper.
Of course, retirement accounts also fall under the umbrella of brokerage accounts. These accounts come with special tax advantages, so they should typically be the first choice among budding investors who have not already maxed out their contributions. It’s important to understand that retirement accounts put restrictions on your ability to withdraw money, so these options are not meant for anyone who will need the money in the near future. Once you have maxed out your 401(k), you can turn to an individual retirement account (IRA), which also has tax advantages.
Choosing the Most Appropriate Brokerage Firm
Choosing the type of brokerage account is only part of the battle. After that, you will need to choose an actual broker. Nowadays, because of the overwhelming number of different brokers, you should start with one that requires no fee to open and no minimum. Beyond that, it is crucial to look at what brokers charge for the investments you think you will purchase.
For example, people who want to trade stocks should look for brokers with a low trade commission, while those who are mostly interested in mutual funds can find brokers with mutual funds that do not charge transaction fees, as well as exchange-traded funds without commissions. After all, keeping trading costs low is critical for the beginning investor.
As you get more comfortable with investing, you may want more of the bells and whistles that some brokerages offer. The tradeoff is that these firms often charge more money for transactions or may even have an account fee. Paying these extra expenses only makes sense if you actually use the tools and take advantage of the advice, which is something that comes with experience. The exception to this rule is people who want a hands-off investment approach. While human advisors will almost always cost a significant amount, a robo-advisor can be a very affordable alternative—some accounts charge management fees as low as 0.25 percent, while some charge nothing at all.
How to Set up a New Account through a Brokerage Firm
Setting up a brokerage account usually takes less than 15 minutes and can be done online. The majority of states require you to be at least 18 years old to open one, but parents can set up custodial accounts for their children. Doing this is actually a great way to teach kids about investing while encouraging them not to be scared of it as they grow older.
Brokerages should walk you through the process of transferring funds. Sometimes, you will have the option of a cash or margin account. A margin account makes it possible for you to borrow money from the broker to make certain trades, but you will need to pay interest on the amount borrowed. These kinds of accounts can be risky, so beginners are usually best serviced by simple cash accounts. Once they get comfortable with investing, they can consider switching to a margin account.