Sarah Baldwin: Investing is one of the best
ways to build long-term wealth, but before you can invest, you need to set up a brokerage
account. Like, paying your taxes or making a three-way call, it seems difficult but it’s
actually super-easy. I’m Sarah Baldwin, and in this video from The Ascents Money Lab,
we’re going to break down how to open a brokerage account and what you need to watch out for.
First, you need to start 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. Step 1. Determine the type of brokerage account you need. 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 like. If you choose a cash account, your broker
will likely ask you if you want margin privileges, which 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 fifty-nine-and-
a-half, contributions to Roth IRAs, don’t give you a tax benefit when you make them, but qualified
withdrawals will be tax-free, plus you can withdraw Roth 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). If you’re
specifically looking for an IRA, check the description for a link to our guide to help
you pick the best IRA. Step 2. Compare the costs and incentives.
Some major brokerages charge commissions, some don’t. The costs have generally been
coming down for the average investor, but you need to know what you’re signing up for
so that fees don’t eat up all your returns. It’s also important to review the broker’s
full pricing schedule, particularly if you plan on trading anything other than stocks,
such as options, funds or bonds, as these often come with their own costs. For example,
many brokers charge $0.75 per option contract on top of their standard commission rate.
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.
Step 3. Consider the services and conveniences offered. 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: Access
to research. Many brokers provide their own stock ratings as well as access to third-party
research from firms such as Standard & Poor’s and Morningstar. Foreign trading.
Some brokers offer the ability to convert money in your account into foreign
currencies in order to trade on international stock exchanges. If this is important to you,
make sure the broker you choose allows this. Trading platforms. The various brokerages
offer a wide variety of trading software and mobile apps and many actually allow people
to test out their platforms before opening an account. For example, Fidelity offers a
demo version of its Active Trader Pro platform for prospective clients to test drive.
Also, read some reviews of broker’s mobile apps, if being able to access your account
on the go is important to you. Convenience. Some brokers have large networks
of local branch offices you can visit for face-to-face investment guidance, while others
do not. For example, Merrill Edge customers can get one-on-one advice and guidance at
more than 2,000 Bank of America locations. Also, brokerages operated by banks offer customers
the ability to connect their brokerage and checking accounts, transferring money between
the accounts in real-time and may offer some sort of relationship discount for doing so.
For this reason, it’s also a good idea to check if your bank has an online brokerage,
even if it’s not mentioned here. This isn’t an exhaustive list, so before you choose a
broker, be sure to spend some time on the website exploring what it offers.
Step 4. Decide on a brokerage firm. You’ve gathered your information about various firm
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 the best overall
option for you. For some expert recommendations, check out our list of The Best Online Stock
Brokers at fool.com/brokers. The link’s down in the video description.
Step 5. Fill out the new account application. You can apply to open a new account online,
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.
Step 6. Fund the account. Your new brokerage will probably give you a few options to move
money into your account, including Electric Funds Transfer or EFT. Transferring funds
from a linked checking or savings account is a convenient way to fund the account.
In most cases, the funds will post to the account on the following business day.
Wire transfer, the quickest way to fund your account, since a wire transfer is a direct
bank-to-bank transfer of money, it often takes place within minutes.
Checks. Acceptable forms of check deposits and fund availability vary between brokers.
Asset transfer, if you’re rolling over 401 (k) or transferring existing investments from
another broker, that’s an acceptable funding method. Stock certificates.
Yes, these still exist. If you have a paper stock certificate,
it can be deposited through mail into an online brokerage account.
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.
Step 7. Start researching investments. 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. Before
diving in, it’s a good idea to spend some time learning the basics of how to responsibly
choose stocks, bonds or funds as well as how to create a well-diversified portfolio.
We have tons of other videos on The Motley Fool’s channel about how to start doing your homework
on stocks and we also do live specials featuring some of our analysts’ top stock picks around
themes, like, AI and dividend investing. Make sure you’re subscribed to get all that content
delivered right to you on YouTube. Okay, now what now? Now that you know how
to open a brokerage account and start investing, it’s time to do exactly that. We have a broker
hub set up to walk you through how to get started, to get it, just go to fool.com/brokers
or just click the link in the video description. If you’ve got tips for newbies or horror stories
from your early investing days, we want to hear them. Drop them in the comments section
below. And if you haven’t already, “like” this video and hit the “subscribe” button
to get more content like this from The Ascent. It sounds crazy, but YouTube really loves
it when you do those kinds of things and when YouTube is happy, we make
more awesome content like this. Finally, if you want some help finding the
best stockbroker for you, visit fool.com/brokers for our top picks. Thanks for watching and we’ll
see you next time on The Ascents Money Lab.