How to open a Brokerage Account
Investing is an excellent way to plan for your long-term financial goals. When you open an investment account, you should research the brokerage you’re doing business with, verify the funds you have to work with, then explore all of your investment options available. Finally, you’ll need to actually open the account and follow the procedures laid out by the brokerage. Some these rules are mandated by the Securities and Exchange Commission and the Financial Industry Regulatory Authority (FINRA).
Opening a Brokerage Account – Step One: Verify Your Investment Funds
Before you open a brokerage account, make sure you have the money to do so. It might seem obvious, but many people skip this step. Investing is for the long term you shouldn’t invest any money that you might need access to quickly because it may force to sell at an inopportune time. First, make sure you have three to six month’s worth of income set aside in your savings account. Then, use any savings in excess of this to invest. If you don’t, you might find yourself in an emergency with no other option but to cash out your investments. This could trigger short-term capital gains tax along with the normal broker’s fee for the transaction.
Step Two: Purpose
Make sure you understand the purpose of your investments before you open an account. If you are investing for retirement you will need a different type of account than if you are saving for college or a downpayment on a house. Are you looking to create income or growth? Is this a short term investment or a long term? Once you know the purpose you can choose the right type of investments to meet those needs. If you are just starting out in the investment world focus primarily on mutual funds and other simple investment products rather than individual stocks or Bonds. Often the commissions on mutual funds are lower than individual stocks especially at discount brokerage companies.
Step Three: Research Types of Brokerages
There are generally two types of brokers to choose from: traditional “Full Service” brokers  and “discount” brokers. A traditional broker will help you choose your investments and make your trades. A discount broker is sometimes referred to as an “online broker.” These brokerages are almost always Internet-based brokerage firms with fees that are far lower than a traditional broker. The trade-off, of course, is that you don’t get the support that you get from a traditional broker. When you invest with a discount broker, you don’t have a specific person to go to if you have a question. You simply call the number and the next available broker will help you. Discount brokerages still have research departments and can help you make investment decisions but you don’t get to know “your” broker personally. One advantage is that you can call a discount broker at 2 AM with a question and there will be a licensed broker there to help you.
Step Four: Check Fees
Fees kill investment performance. Your job is to minimize the damage. All things being equal, the lower the fee, the better. Of course, don’t sacrifice speed of execution and customer service for price. Choose a broker with the lowest fee you can find that still executes trades quickly and has good customer service. Companies that advertise trades for $10 or less are good for price, and the company should be a well-known brand.
Step Five: Gather Your Paperwork
Your brokerage firm is required to ask for your Social Security Number or tax identification number. This is for tax purposes. You must also submit a copy of your driver’s license or passport information or some kind of government-issued identification. Finally, you’ll have to prove your income, and state how much you make each month along with how much you plan to invest. They will probably ask about your investment experience and investment goals. Are you saving for college, retirement, a down payment on a house or are you an aggressive speculator who wants to double his money this year?
Step Six: Decide On The Type of Account You Want
You can choose between a cash brokerage account or a margin brokerage account. A cash account restricts your investment potential to the money you have available in your account i.e. you can only buy as many stocks as you have money for. A margin account on the other hand, allows you to invest all of your cash plus up to 50 percent of the value of the stocks you are holding in your account. This is called buying “on margin.” The brokerage will lend you the additional money and charge interest on it until it’s repaid. In other words, it is like having a line of credit attached to your brokerage account.
A margin account is riskier to maintain than a cash account, but provides for more investment potential because it provides “leverage”. But leverage works both ways, it can help your account rise faster in good times but also fall faster in bad times. When using a margin account, be aware that if your investments decline significantly, the brokerage company may sell off your investments without prior notice to pay off the loan. This is called a “margin call.”
Step Seven: Sign Brokerage Paperwork
Finally, brokerages have their own internal paperwork like “terms and conditions” and “customer agreements.” This paperwork outlines the terms you must agree to when opening your account. It will also explain how your brokerage works, the fees for trading, and any other rules you must follow while doing business with the firm. Your agreement will also outline the firm’s responsibilities to you.
Good luck as you enter the world of investments. Be cautious and do your homework before investing in anything.
See Also:
The Frugal Guide to Building Wealth
How Do I Start Investing in Stocks?
Investing on the Edge: Buying Stocks On Margin
Five Mistakes the Average Investor Makes
Is a Retirement Annuity the Answer for your Retirement Savings?
Retire In 10 Year Years? Here’s How…
About the Author:
Guest post contributed by Hayley Spencer.
