Geeky Insight:

Brokerage Account: What It Is and How To Open One

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Written By: DollarGeek

One of the prerequisites of investing in the stock market is to have access to a brokerage account.

Stockbrokers act as intermediaries between traders and stock markets. You need a brokerage account to execute your trades.

As a new investor, you may find it challenging to choose the right brokerage account. A simple search on the internet will reveal hundreds of brokerage firms, starting from local banks to large banks, fintech startups, and multinational enterprises.

How can you choose the right brokerage account?

We have created this guide to address the most common concerns and doubts of new investors when it comes to brokerage accounts.

What Is A Brokerage Account?

Stocks, bonds, exchange traded funds (ETFs) and mutual funds are examples of investments you can purchase and hold with a brokerage account.

The brokerage firm that opens a brokerage account buys and sells your investing assets on your behalf, as well as serving as your custodian for the securities you own. You can open taxable investment accounts and retirement accounts with a brokerage firm, but investments held in either account are tax-segregated.

To open a brokerage account, follow these steps:

How do brokerage accounts work?

Brokerage accounts are similar to any other financial account.

You have to start by choosing a brokerage firm for your account. It can be a traditional bank that may require you to visit a branch for account opening or an online discount broker that operates through digital channels. You’ll have to provide some personal information and financial details to set up your brokerage account.

Once your account is active, you need to fund it before you can start trading. You can link your checking or savings account for electronic transfers. Alternatively, you can use wire transfers or checks to fund your brokerage account.

Now that your account is funded, you’re ready to trade in the stock markets. Any orders you place through the brokerage account will be executed by your broker. Your brokerage account can hold stocks as well as cash.

How to choose a brokerage account for investing

Identify your goals with the brokerage account.

Your search for the right brokerage firm starts with an analysis of your investment needs. If you’re a new investor, you may want a brokerage account that offers educational resources, easy access to customer support, and a demo account.

On the other hand, a seasoned trader will prioritize features, such as technical analysis, charting options, ability to place custom orders, and access to broader investment products and asset classes (commodities, stocks, derivatives, and mutual funds).

Additionally, you would want to evaluate full-service brokerages as well as discount brokers based on your preferred style of investing. New investors will benefit from expert guidance and professional management.

As a new investor, it is critical to understand that brokerage accounts are taxable, which means any capital gains you receive through trading are subject to taxation. You’ll require a tax management strategy.

Choosing between discount stockbrokers, full-service brokerage accounts, or robo advisors

Now that you are aware of your investing goals let’s review the different types of brokerage accounts available in the market.

  • Discount brokers
    Online discount brokers offer low or zero-commission trading. You get access to a wide variety of charts and analysis tools. However, you should already have the necessary knowledge to read these charts. Online discount brokers are suitable for experienced investors.
  • Full-service brokerage accounts
    Full-service brokerage firms operate with teams of financial advisors. These financial advisors provide trading advice, create investment portfolios, and adjust your investing strategy in accordance with the changing market sentiment. A full-service brokerage firm is what new investors should look into. These firms provide research and investment advice, investing strategies, tax strategies, and even retirement planning assistance. On the downside, you’ll have to pay a decent fee to procure these services.
  • Robo advisors
    Robo advisors are gaining popularity among young investors. They act similar to a traditional full-service firm with one key difference. They use an algorithm to pick stocks for your portfolio. Robo advisors take your investment goals, risk profile, and investment term into account before choosing investments for your portfolio.

You can choose between conservative, moderate, and aggressive investment strategies. Robo advisors choose a variety of asset classes to create custom portfolios.

Robo advisors charge significantly lower fees in comparison to their human counterparts. Also, most robo advisors have no minimum investment requirements. Take a look at some of the best robo advisors and online brokerage accounts below:

Hands Off Brokerage Account:

Best for unexperienced investors:

Robo Advisor

Rating

MINIMUM

Cost

LEARN MORE

(4.5)

$0

to start

0%

management fee

(5.0)

$500

to start

0.25%

management fee

Hands On Brokerage Account:

Best for experienced investors that want to manage all of their investments:

Online Broker

Rating

Fees & Commission

MINIMUM

LEARN MORE

(5.0)

$0

per trade

$0

to start

(4.5)

$0

per trade

$0

to start

(5.0)

$0

per trade

$0

to start

What type of brokerage account do you want?

Depending on your investment objectives, the type of brokerage account matters.

There are several types:

  • Traditional brokerage account: The broker will most likely ask you whether you wish to open a cash account or a margin account if you choose to open a traditional brokerage account. This basically means that if you choose to apply for margin privileges, you can borrow money to purchase stocks, with your portfolio serving as collateral for the loan. In addition to paying interest on the borrowed funds, you should be aware of some inherent risks associated with investing on margin.
    Individual Retirement Account (IRA): If you are looking to save for retirement then an IRA is the appropriate account for you.  If you contribute to a traditional IRA, you can get a tax deduction, but you cannot withdraw your money until you are 59.5 years of age. You can withdraw your contributions (not your investment profits) at any time even though Roth IRA contributions do not provide you with a tax benefit.
    Other IRAs: if you are self-employed, there are some special options for you. These include SIMPLE IRAs, SEP-IRAs, and individual 401(k) plans.

A taxable account and an IRA are two examples of brokerage accounts that many people open in order to keep their money separated from one another.

Pay attention to the tools and features offered with the account

After choosing the type of brokerage firm you want to work with, the next step is to identify the tools and features you require.

  • Research: Find out if the brokerage provides its own research or third-party research and analytics module. Most brokerage firms will charge a fee for this service, but what you want to know is how their research is rated by professional traders.
  • Educational content: For new traders, access to informative content is essential. Check the learning module or knowledge center of different online brokers. You should be able to find answers to most of your questions.
  • Trading platform: Most brokers provide web and desktop trading platforms. You should be able to get a feel of the trading platform through a demo version. If you want mobile trading capabilities, don’t forget to check the app-based trading platforms.
  • Technical analysis and charting: If you’ve some experience with trading platforms, you’d want to check the technical analysis tools and charts provided within the account. Pay attention to the type of orders supported by the trading software.

These features will help you narrow down a handful of names.

Use the demo version or trial version

At this step, you already have a list of suitable brokerage services. It’s time to test these platforms by signing up for the trial version.

Most brokerage firms offer a demo version or trial period with dummy funds. You can try executing trades, apply research tips and investment advice, and use charts for analyzing trades.

Use these trial accounts to get a feel of the platform and overall user experience.

Check customer service and feedbacks

Before you register your account, the last step is to check the customer service and feedback of the brokerage firm.

At DollarGeek, we look at various parameters when evaluating brokerage accounts. Here are some DollarGeek-verified brokerage accounts that you can look into.

You can check online forums and reviews to identify any gaps in customer service. It is always best to check the bad reviews first and see if you can find a pattern in complaints. If multiple users are complaining about a particular feature, it’s likely to be true.

Open your account

Finally, you’re ready to open your brokerage account. Fill out the application form, submit your financial details, and fund the brokerage account. Most online brokerage accounts take only a couple of minutes to open.

You’re ready to place your first order!

Thinking you’re not ready to start investing?

Investing in the stock markets could be intimidating for new investors. A survey reveals that more than six out of 10 Americans feel anxious about investing in the stock markets out of the fear of a market crash.

What is even more surprising is that millennials have a higher level of anxiety (72%) in comparison to baby boomers (55%) and Gex Xers (56%).

It’s okay if you’re a bit anxious. You can start with safer options instead of going on your own. Start with simple investment products, such as low-risk index funds and mutual funds. Understand that even the likes of Warren Buffett recommend retail investors to go with index funds for long-term growth.

Next, start analyzing stocks and practice on demo accounts. You may want to start with an additional research service or a full-service platform.

Investing is all about having patience and analyzing stocks before placing an order. The trick is to learn with every single mistake. No one wins all the trades, so spread out your risk across different orders.

There’s no need to feel overwhelmed when it comes to choosing the right brokerage account. To find the perfect online broker for you, decide what type of account you want, then compare several brokers.