Choosing the right brokerage account can seem like a difficult process, but it doesn't have to be. By deciding what type of account you want, and then comparing several online stock brokers, you should be able to choose the one that best meets your needs.
Here's your step-by-step guide for opening a brokerage account:
What are your investment objectives? If you simply want to invest for a rainy day or for a certain relatively near-term goal, and don't necessarily want your money tied up until you retire, a traditional brokerage account is the way to go. These accounts don't have tax advantages -- you may have to pay tax on investment profits and dividends -- but you are free to withdraw your money whenever you'd like. For this reason, a traditional, or standard brokerage account is often referred to as a taxable brokerage account.
If you choose a traditional brokerage account, your broker will likely ask if you want a cash account or margin account. If you choose to apply for margin privileges, this basically means that you can borrow money to buy stocks, with the stocks in your portfolio serving as collateral. You'll pay interest on the borrowed money, and there are some inherent risks involved with investing on margin that you should be aware of.
On the other hand, if your goal is to save money for retirement, an IRA is the best bet. Traditional IRAs can get you tax deductions when you contribute to them, but you won't be able to use your money until you're 59-1/2. Contributions to Roth IRAs don't give you a tax benefit when you make them, but qualified Roth IRA withdrawals will be tax-free. Plus, you can withdraw Roth IRA contributions (but not your investment profits) whenever you want. Finally, if you're self employed, there are some special options for you, such as a SIMPLE IRA, SEP-IRA, or individual 401(k). You can read through a more thorough guide to help you pick the best IRA as well.
It's also worth noting that many people choose to open multiple brokerage accounts -- such as a taxable account and an IRA, in order to keep their money in separate baskets.
These days, virtually all of the major discount brokers offer commission-free trading. They may also offer you a discount to reward you for certain actions, such as transferring a large investment account from another broker.
That said, it's important to review each online brokerage firm's full pricing schedule, particularly if you plan on trading anything other than stocks (options, mutual funds, ETFs, bonds, etc.), as these often come with their own costs. For example, many brokers charge a commission in the range of $0.50 to $0.75 per options contract, so even if the broker doesn't charge a base commission, options trading won't exactly be free.
Finally, many brokers offer incentives in order to attract business, and you don't need to be a millionaire to take advantage of them. I'm not saying that a good incentive all by itself should sway your decision, but it's definitely a piece of the puzzle worth taking into consideration.
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Pricing isn't everything -- especially for new investors. Of course, all other things being equal, it's best to find the lowest price, but here are a few other things you need to consider when picking a broker:
You've gathered your information about various firms' costs, fees and the conveniences they offer. For each brokerage, you should weigh the pros and cons as they pertain to your investment objectives, and determine which broker is right for you.
For more information, check out our top picks for the best brokerage accounts for beginners.
You can apply to open a new account online, and this is generally a quick and painless process with online brokers. You'll need some identifying information, such as your Social Security number and driver's license. You may need to sign additional forms if you're requesting margin privileges or the ability to trade options, and the broker will need to collect information about your net worth, employment status, investable assets, and investment goals.
Your new online broker will probably give you a few options to move money into your account, including:
As a final note, when funding your new account, be sure to keep your broker's minimums in mind. Many have different minimums for taxable accounts and retirement accounts, and they also may have different minimum requirements for margin accounts.
Congratulations on taking the initiative and opening a brokerage account -- your future self will thank you for taking this important step on the road toward financial security.
Now comes the fun part: investing in stocks. Before diving in, it's a good idea to spend some time learning the basics of how to responsibly choose stocks, bonds, and/or funds, as well as how to create a well-diversified portfolio.
Uncover the names of the select brokers that landed a spot on The Ascent's shortlist for the best online stock brokers. Our top picks pack in valuable perks, including some that offer $0 commissions and big bonuses.
The Ascent's definitive brokerage account guide covers the essentials so you can confidently take action. Get started and read our beginner's guide to brokerage accounts.
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