Before you begin to build your fortune by investing in stocks, you will have to open a brokerage account. This type of account is opened with a brokerage that contains a fund of money to invest on your behalf in stocks, bonds, mutual funds or other investment packages.
Here’s everything you need to know about how a brokerage account works.
Click here to read about how not understanding investment fees can cost you.
How to Open a Brokerage Account
Opening a brokerage account is a fairly easy process; most financial institutions will allow you to fill out the application online. You will typically need to provide the following personal information to open your brokerage account:
- Social Security number
- Date of birth
- Valid mailing and email address
- Employment information
- General financial information, such as a checking account to fund your brokerage investment account
Once you open your account, you can begin trading.
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Minimum Account Balances
Most brokerages require a minimum balance to be maintained in the brokerage account. Minimum balance requirements vary among brokerages, with some having no minimum balance requirement and others having minimums of $2,000 or more.
Brokerage Account Fees
Brokerages charge a fee per trade, which is called a commission. Commissions vary depending on what type of brokerage you choose, but they can be as low as $1 or up to hundreds of dollars if you’re working with a high-end brokerage.
Discount brokerages and online brokerages tend to be cheaper than traditional brokerages because they only execute your orders to trade and do not provide additional personalized money management services and advice.
Types of Brokerage Accounts
You can choose from several types of brokerage accounts. The best brokerage account for you will depend on your needs and investment goals.
Full-Service Brokerage Account
A full-service brokerage provides clients with a variety of services, including investing advice, retirement planning help and other wealth management services. This type of brokerage account might be the best trading platform for someone who doesn’t have the time or desire to stay up to date on financial news and regulations and who wants more services outside of basic trading. Commissions tend to be higher at full-service stock brokerage firms than at discount brokers, however.
Examples of companies that offer full-service brokerage accounts include:
- Merrill Lynch
- Morgan Stanley
- Wells Fargo Advisors
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Discount Brokerage Account
Discount brokerages offer stock trading and other investment trading per the client’s wishes; they do not offer advice or wealth management services. Because discount brokers do not offer the same suite of services as full-service brokers, their commissions are much lower.
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Discount brokerage accounts are a good option for people:
- With enough knowledge of the stock market to not need advising
- Who trade often who will benefit from the lower commissions per trade
- Who don’t have the means to pay for a full-service brokerage
Examples of companies that offer discount brokerage accounts include:
- Ally Invest
- Fidelity brokerage accounts
- TD Ameritrade
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Online Brokerage Account
Online brokerage accounts are discount brokerage accounts that allow clients to buy and sell investments directly online. Because overhead costs are low for online brokerages, commissions are usually very low as well. These types can be good brokerage accounts for beginners.
Nowadays, you can choose from numerous online brokerages, including E-Trade, Merrill Edge, TradeStation and Vanguard brokerage accounts. When making an online brokerage account comparison, you should take into account the commission charged, whether or not commission-free trading is available, the minimum account balance, and any additional services offered by the broker.
Cash Brokerage Account vs. Margin Brokerage Account
When choosing your brokerage account, you will also need to decide between a cash account and a margin account. With a cash account, you can only purchase securities with the money you have in your brokerage account. With a margin account, you can borrow money from the broker to invest in securities, but you will have to pay interest on the money borrowed. If the value of your shares declines too much, the broker can sell your shares to pay back the loan.
What Is Downward Price Pressure?
Downward price pressure occurs when there is a market surplus — or excess supply — of a product or investment. When supply is greater than demand, sellers will lower prices to appeal to buyers. Downward price pressure can cause stocks to plummet.
Types of Investments
Having a brokerage account enables you to buy and sell numerous investment products, all of which come with their own risks and benefits. Here are some of the most common investment products:
- Common stocks: A common stock allows the shareholder to vote at shareholder meetings and to collect dividends.
- Preferred stocks: Preferred stockholders receive dividends before common stockholders, and they get priority over common stockholders if the company goes bankrupt and is liquidated. They don’t typically have voting rights, however.
- Bonds: A bond is a loan with defined terms for the borrower to pay back the lender. When choosing a bond, the lender should take into consideration the yield, maturity date and rating.
- REITs: A real estate investment trust allows an individual to invest in a large-scale property, such as a shopping mall or apartment building. REITs are generally considered safe investments with high returns.
- Mutual funds: With mutual funds, a pool of money is collected from many investors that is then used to invest in other securities, such as stocks, bonds and short-term debt.
- ETFs: Like mutual funds, exchange-traded funds are a collection of funds from a pool of investors that are used to purchase other securities. Unlike mutual funds, however, ETFs are traded on an exchange.
- MMAs: Money market accounts are similar to savings accounts. They typically offer higher interest rates than traditional savings accounts, but they usually require a higher minimum balance and limit the number of withdrawals the account holder can make in a given period of time.
- CDs: Certificates of deposit are considered low-risk investments. With a CD, you deposit a fixed amount of money for a fixed period of time, during which your investment accrues interest at a rate typically higher than what you would get with a traditional savings account.
- Options: An option is a contract that gives the owner the right to buy or sell a certain asset at a set price on or before a specified date. Options trading can involve a range of financial products, including stocks and foreign currencies.
Limits on Brokerage Accounts
You aren’t limited in the amount of money you can deposit into a brokerage account, although some brokerages have a daily contribution limit of $250,000 per day, as that is the maximum daily amount most U.S. banks allow for ACH transfers to a brokerage account. And there are no limits to the number of brokerage accounts you can have, so some investors have multiple accounts.
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Brokerage Account vs. IRA
Unlike brokerage accounts, an individual retirement account does limit the amount of money you can deposit into it each year. For 2018, the maximum contribution to a traditional or Roth IRA is $5,500 per year — or $6,500 if you are 50 or older — or your total earnings for the year, if your earnings are less than the cap amount.