How to Open a Brokerage Account

Thinking about opening a brokerage account? 💭

That’s definitely a good idea. But there are some key aspects you need to consider before getting started.

Opening a brokerage account is both a common practice and isn’t as well understood as it should be. Practically everyone ends up having some presence in the stock market in one form or another.

Most people get investment accounts, like 401(k)s, usually with an advisor, or they might be given a few stocks as a birthday present. Despite the stock market’s ubiquitous presence in everyday life, few people know how to properly open a brokerage account, let alone choose a suitable broker. Investing a small part of your savings can go a long way if done right, so let’s talk more in-depth about how to get a good broker.

Today, let’s go over the most crucial aspects of opening a brokerage account. Armed with this knowledge, you’ll be more than ready to invest wisely and earn a bundle over the next five, ten, or even fifty years. 💪

The stakes are high, so let’s dive in. Here’s a brief overview of the major sections we’ll cover:

What is a Brokerage Account? 📚

In a nutshell, these are accounts that let you purchase investments – often referred to as “financial assets” – in the stock market. These accounts are opened with brokerage firms or “brokers” for short. Essentially, you use a stock broker to put your money in the stock market but can leave the actual spending of the money up to the expertise of stock market pros.

In a brokerage account, you still own the money and investments contained within that account even though the broker does most of the buying and selling. The broker is an intermediary between you and the market. You ultimately decide what happens to your funds, assets, or other elements.

Brokerage accounts allow you to purchase several different types of investments. These include bonds, stocks, mutual funds and more, including complex options like futures and cash management accounts.

These days, it’s pretty easy to quickly open a brokerage account online and there is a lot of people opening brokerage accounts these days. You can transfer money almost instantly via a standard checking or savings account. This only takes up to a week. Alternatively, you can transfer money to a brokerage account from an existing account if you change firms.

Most brokerages don’t require you to have lots of money to open an account. They do require you to have some money if you want to purchase investments.

You can open as many brokerage accounts as you like, as there aren’t any fees to open one. You can also deposit as much money as you please into a taxable account every year, so there’s no real limit to what you can earn on the market. Be aware, of course, that most brokerage accounts are taxable.

Does a Brokerage Account Earn Interest? 🧐

Some brokerage accounts do earn interest and some do not. The majority of high-quality brokerages advertise accounts that pay interest in order to attract clients with lots of cash.

You should always check to see if you are getting monthly interest payments when you hold a brokerage account. Whether a brokerage account has a desirable interest rate is one of the factors that may lead you to choose them over another firm’s account.

How Much Does it Cost to Open a Brokerage Account? 💵

This depends on the type of brokerage account you open. Some online brokerage accounts are totally free and are ideal for investors that only have limited funds. However, virtually all brokerage accounts require that you invest some amount of money into the account before you can begin purchasing assets.

This opening minimum can be below $1000 for some of the cheapest accounts on the market. Very few brokerage accounts require initial investments of over $3000. 

Of course, if you are interested in investing in some big names, like Apple, Tesla or other giants then you might need to consider investing more funds.

The opening fees aren’t the only costs you’ll pay in the early days or weeks of your brokerage account, however. As soon as investment begins, you’ll begin paying fees, like trading commissions, in order to buy stocks and other options, plus any maintenance fees or charges the broker or firm may claim for their services.

In short, a brokerage account can cost you nothing at all or upwards of several thousand dollars before you begin earning money.

Do You Have to Pay Taxes on a Brokerage Account? 🤔

It depends on the type of brokerage account we’re talking about. In general, regular brokerage accounts are taxable unless they are a specific kind of retirement account. Thus, any profit you make as your investments rise in value or any money you earn via dividends or interest is taxable and must be reported at the end of the year.

There are a lot of things you need to keep an eye on when taxes are involved, and while everything is evolving, there will always be new things to watch out for. The first thing to do is to make sure you know where your gains and losses are reported in your brokerage account.

Is My Money Safe in a Brokerage Account? 🛡

The desire to keep the money of investors safe since the 1960s inspired the creation of the Securities Investor Protection Corporation or SIPC. Simply put, this organization is a brokerage account insurance company that protects your assets in case your broker or firm fails. However, the insurance provided by the SIPC doesn’t cover all losses.

The SIPC provides insurance both at large and for member brokerages who are part of the SIPC umbrella; this is a factor you should consider when choosing a new broker. The insurance extends to: 

• ☑️ up to $500,000 of protection, including up to $250,000 in cash
• ☑️ an additional $500,000 for accounts that member brokerages – this is separate protection

In essence, this allows you to work with multiple brokerages or firms to maximize your protection from this insurance. You can have multiple $500,000 maximum accounts, all insured under the SIPC protections.

SIPC insurance covers most of the typical assets that a brokerage firm will invest in, including stocks, mutual funds, certificates of deposit, and treasury securities. It does not cover rare assets like fixed annuity contracts, foreign exchange rates, futures contracts and more.

Additionally, SIPC protection doesn’t cover you in the event that your stocks lose 50% of their value because of poor strategy or because of bad market events (i.e. a recession or depression). It only protects you in the event of brokerage liquidation.

Does Opening a Brokerage Account Affect Credit? 💳

In most cases, opening a brokerage account does not negatively affect your credit. While brokerage firms will do a check on your credit score, this is not deemed a hard inquiry, so it doesn’t lower your credit score by one to three points. Opening other types of stock trading or credit accounts can negatively affect your credit, however.

Types of Brokers 🗃

Broadly speaking, there are two main types of brokers/brokerage accounts: full service and discount. Full-service brokers are exactly what the name suggests. They hold your hand throughout the entire stock trading process and can act as guides, offering advice when it comes to which options are stocks to buy or sell and help you set up different accounts for your family or children. They often employ wider teams of investment professionals.

However, the downside is that these types of brokers usually demand much higher commission fees in exchange for their greater services. These fees may not add up to much if you are trading in the hundreds of thousands of dollars and are likely to see significant returns over the following decades. But they can eat into smaller returns, particularly for short-term investments that will be used within a few years.

The payment plans for traditional or full-service brokers can vary greatly depending on the firm in question. Some have annual fees based on a percentage of your assets, while others have models incorporating trading commissions and other fixed fees.

The other type of brokerage is a discount firm. As the name suggests, the top discount brokers give you the tools necessary to trade your own stocks and options yourself. They don’t offer advice and don’t stop you from making potentially terrible trades. The advantage of this is that you spend very little on fees or commission costs compared to the first option. But you need to have some experience trading in order to avoid making a costly mistake and losing lots of money.

Beyond these two basic types, brokerages also vary dramatically based on the types of assets that they trade. For instance, the majority of brokerages hold stocks, mutual funds, and exchange-traded funds (ETFs). Others may sell options – in brief, stocks give you a small piece of ownership in an organization or company and options give you the right to sell or buy a stock at a certain price by a specific date. Options are, therefore, riskier than other investment options.

Other brokerages might let you invest in fixed income securities, and plenty of others include further financial assistance or robot advisors.

Retirement Accounts 👪

Another big decision you want to make is whether you’re opening a taxable brokerage account or a retirement account. Tax-free/deferred investment accounts are called individual retirement accounts, or IRAs.

In a nutshell, traditional IRAs are tax-deferred accounts in which you contribute pretax dollars without paying taxes as you have money to the sum. You only pay taxes when you withdraw the account contents in retirement. Int his way, you can benefit by sliding to a lower tax bracket once you enter retirement, so you pay less by taking the money out at age 65 than you would by taking it out at age 35.

The tax-free account type is the Roth IRA. This retirement account will have you contribute post-tax dollars to the account sum as you proceed. Instead of paying taxes on the total sum of the account when you withdraw it, the money has already been legally taxed. So you don’t get taxed a second time when you withdraw it in retirement. Another big difference between these two account types is a Roth IRA contributions have certain income limits, so you can’t just throw several million dollars in at once.

Other Aspects 💵

You’ll also want to consider whether the brokerage you are considering is part of the SIPC umbrella. This grants you the opportunity to save additional money by spreading your earnings out across several brokerages.

Finally, you need to determine who the account will be for and whether this affects the brokerage you should provide your business to. Some accounts, like those for a kid’s college education, are specific for that purpose and may be tax-advantaged, offering additional savings opportunities.

What is the Best Brokerage Account for Beginners? 🌱

The best brokerage account for beginners depends on how much money you want to invest. If you only have a little bit of cash, you might benefit from experimenting with a discounted trading account that isn’t building up a big bundle for retirement. This way, you don’t lose too much if you end up making poor decisions on the stock market and gain some experience at the same time.

Alternatively, if you have lots of money and want to make sure that you start building up a stockpile for retirement, you should invest in a full-service brokerage account. While the fees will be steeper, the advice and safety that comes with a full-service brokerage are more than worth the cost. This is doubly true if you want to make sure your retirement nest egg is secure.

What to Look For in a Broker 🔎

When you’re looking for an ideal brokerage account for your needs, we’d recommend considering the following aspects.

Assets Offered 📜

As mentioned, most brokerages allow you to trade stocks as a default. But plenty of other brokerages will allow you to trade additional assets, including options, commodities, and derivatives. These securities are often riskier but also hold the potential for greater earnings.

Thus, you’ll want to consider whether a brokerage is more equipped for beginners or expert investors. Those brokerages that let you trade lots of different types of assets are often better choices if you have plenty of investment experience. Those that only deal in stocks and maybe one or two other assets are better if you are a beginner.

Services and Conveniences 👷‍♂️

Of course, the majority of full-service brokers will necessarily include more services as part of their package then discount brokers. But you should still investigate all your options before settling on a decision. Some brokers have more advice to give, more help to provide, or might help you set up more accounts for different family members than others.

Furthermore, look into whatever perks are conveniences that a brokerage may offer its members. For instance, plenty of well-known brokerage firms have certain deals with major credit card companies. This gives you additional offerings or discounts with those credit cards that the general public doesn’t have access to; 1.5% cashback on eligible purchases is a good example.

Research Tools 🕵️‍♂️

Some brokerages have more advanced or user-friendly tools than others. The tools available could be stock market charting services or analytical tools, educational videos and guides, stock pricing alerts and more. Others may also include the popular robo-advisors that have you take surveys to provide investment recommendations based on big data.

Plenty of full-service and discount firms will give you access to equity mutual fund research data. This allows you to make more informed decisions about your investments and discuss your options with your brokers.

Fees and Commissions 💰

While all brokerages will have some form of fee for their service(s), these can vary dramatically based on the services rendered or the size of the firm. These days, many brokerages are reducing their charges in order to compete with digital stock trading platforms.

A good rule of thumb is to expect to pay between $5 and $10 for every trade you make. But consider that some brokerages have different payment schemes. For instance, they may only charge you an annual fee based on the account total. Many full-service brokerages use this model since it reflects how successful they were over the course of the year.

Also notes that several brokerages offer free trades for certain mutual funds and other ETFs. This can help you save money if you plan to trade by yourself and don’t have a lot of cash to spend initially.

Account Minimums 💷

The account minimum (i.e. the balance you have to place in the account for it to fully be opened) will vary between brokers drastically. Most brokers have minimums of around $1000 or $2000. Plenty more will let you open an account with even less money so long as you deposit more money on a regular monthly basis from a linked checking or savings account.

Customer Service ☎

Don’t neglect the customer service side of this equation! You’re paying for a brokerage’s service, so the customer service should be top-tier. The majority of brokers already offer 24/7 aid to their customers, which may include both phone communication and live chat support. Full-service brokers often have deeper connections between broker and investor, so you can expect a greater level of customer service from them as opposed to discount brokers.

You’ll definitely want a brokerage that communicates to you clearly and quickly rather than routing you through several layers of automated responses before you talk to a real person.

Is It User-Friendly? 👤

One last thing to consider before opening an account is to see whether the interface and overall tools available are user-friendly. This may involve checking out reviews from those who already use a brokerage in the past. Or it might involve downloading trial software so you can see how all of the available tools work out, particularly if you go with a digital-only broker.

How to Sign Up With a Broker 🏗

Once you’ve determined the ideal brokerage for your needs, it’s time to sign up.

Regardless of which type of brokerage you choose, you’ll need all your identifying information in order to begin the process. This includes your Social Security number, date of birth and address, and other basics. Be sure to have your passport and residency visa on hand if you aren’t already a US citizen.

You’ll also be required to give your broker extra information in order to help verify your identity. Brokerages need to make sure that they don’t unintentionally allow money-laundering or identity theft to occur under their noses. As a plus, this information can help you recover your account if you ever forget your password.

Many of the questions you’ll be asked will involve how financially risky you are, what your investment plan is, your tax status and more. 

Setting Up an Account ⚙

After answering all your questions and putting your account together, your brokerage representative will then have you set up an ID and password to log into your account. You’ll need to link a bank account to the brokerage; this can usually be checking or saving, and you can find the routing number on your bank’s website or on a check.

It’ll take some time for the brokerage account to verify your bank information and transfer the required minimum funds. Don’t be surprised if this takes up to a business week. Some brokerages may allow you to wire transfer money to your account, which is much faster. Or they may let you roll over existing investment assets from another account or brokerage. You’ll still eventually need to link a bank account to the firm, however.

After this point, you’ve officially opened a brokerage account and are ready to begin trading. If you have a full-service account, you’ll likely have one or more meetings with your broker on the phone or in person. They can discuss your various options and help you come up with an investment plan and portfolio. If you have a discount brokerage account, the floor is yours; you can trade at your leisure.

Conclusion 🎬

Congratulations! You’re now an investor in the stock market! This is a big milestone that many people take too long to reach, and the potential for long-term success and financial freedom is real.

Even with all the advantages, about 44% of Americans do not invest, partly because of nervousness concerning their own skills or the market’s long-term instability. But investing in the stock market allows you to set long-term monetary goals. Furthermore, it’s the only real way to guarantee you have enough for your retirement costs; saving alone is rarely enough.

Investing in the stock market through a brokerage account is a wise decision, through and through. 🎉

Get Started With a Stock Broker

That’s it! Ready to sign up with a broker? Here are our top picks for beginners: