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How to Open a Brokerage Account: What You Need to Start Investing

Find out the steps you need to take to open a brokerage account so that you can begin investing and make trades as soon as possible.

If you want to start investing, opening a brokerage account is usually the first step people take. 

A brokerage account allows you to buy and sell investments that the particular brokerage firm supports.

Depending on where you open your brokerage account, you may have several account types to choose from. The one you choose depends on your goals and personal situation.

The best part:

Opening a brokerage account isn’t difficult. But, it can be overwhelming for a new investor.

Here’s what you need to know about how to open a brokerage account.

1. Consider These Things Before You Open Your Brokerage Account

You shouldn’t open a brokerage account at the first company you come across.

Instead, consider these things before choosing a brokerage firm.

Your preferred types of investments

Each brokerage firm offers different types of investments.

The common types include:

  • Stocks
  • Exchange-traded funds (ETFs)
  • Mutual funds
  • Bonds
  • Options
  • Certificates of deposit (CDs)
  • Foreign currencies
  • Cryptocurrencies

Some have a wide variety of investment types and offerings while others have limited choices.

For instance, Acorns only allows you to purchase one of five portfolios of exchange-traded funds (ETFs). This may work well for someone just starting to invest that wants a simple way to get started.

On the other hand, you can buy a massive variety of investments with a traditional brokerage firm such as Vanguard or Fidelity. These accounts may be a better fit for established investors with a particular strategy in mind.

Before choosing which firm to open your account at, make sure they offer the investments you want to invest in.

If it is a specialty investment, such as cryptocurrency, you have fewer options than mainstream assets, such as stocks.

Brokerage fees

Brokerage fees can take a considerable bite out of your investment portfolio. The impact gets bigger over long periods. 

When considering brokerages, see if they charge fees to buy or sell investments. These fees are often called commissions.

Furthermore:

You should also look for other fees you would incur if you opened an account there. Some charge monthly maintenance fees. Other brokerages may charge an annual account management fee that is a percentage of your assets.

If you’re investing in a mutual fund or ETF, check the expense ratios of the funds they offer

The closer the expense ratio is to zero, the less you pay in fees. Even a 0.25% difference in expense ratios can result in tens of thousands of dollars difference over 40 years.

Reducing fees is essential. The less you pay in fees, the more money you get to keep to build your wealth.

Type of account

You need to look at the types of accounts you can open at a brokerage firm. 

Common options include:

  • Taxable brokerage account
  • Traditional IRA
  • Roth IRA
  • SIMPLE IRA

Most brokerage firms support a taxable brokerage account. This is the standard and doesn’t provide any tax benefits.

Many firms also offer individual retirement accounts (IRAs). These are tax-advantaged retirement accounts. However, there are also specialized IRA and retirement accounts that only larger firms generally offer. 

If you need a specialized account, such as a SIMPLE IRA or Solo 401(k), you need to make sure the firm offers it before opening your account.

2. The Timeline of Opening a Brokerage Account

The speed of opening a brokerage account depends on your particular situation and the brokerage firm you choose.

That said, it isn’t normally a drawn-out process. (It can be done in under 10 minutes.)

To start, you need to fill out the application to open a brokerage account. 

This requires you to provide fairly standardized information you expect to see when opening monetary accounts.

Each brokerage firm may ask their own specialized questions, too.

Information and documents needed

Opening a brokerage account requires you to provide certain information the broker needs to set up your account.

You need your personal information, such as:

  • your name
  • address
  • date of birth
  • phone number
  • email address
  • Social Security number

The firm may ask about your income and net worth to help determine which investments you can access. Some require a particular income or net worth to be able to invest in them.

You have to provide information about your employer, as well. This can help verify your identity.

The firm will ask whether you’re a U.S. Citizen or not.

You have to provide some sensitive information, too. You must provide your Social Security Number to open your account because the brokerage must report tax information to the IRS.

In some cases, the brokerage firm may require you to verify this information. They may ask you to send copies of documents such as a driver’s license to do this.

To fund your account, you typically have to provide your bank account and bank routing number, too.

What Type of Account Should You Open?

When you’re opening a brokerage account, you have several options to choose from.

Should you open a cash or margin account?

A cash brokerage account allows you to make trades based on the cash you deposit in the account. A margin account lets you invest with both your cash plus borrowed money.

Investing on margin is something that should usually be avoided, especially for new investors. Opening a cash account is generally your best bet so you aren’t tempted to use margin.

Should you open a taxable or retirement account?

Deciding whether to open a taxable or retirement account depends on your goals. 

If you don’t need to touch the money until retirement, retirement accounts may provide tax benefits.

People that may need access to the funds before retirement are normally better off with a taxable brokerage account. 

These accounts don’t have penalties if you withdraw the money before age 59.5 as most retirement accounts do.

3. Fund Your Brokerage Account

After you fill out the application and select an account type, you need to fund your brokerage account. 

This is often done by an electronic ACH transfer which may take a couple of days to land in your account. 

In some cases, you can send a paper check if you prefer. It takes longer to process, though.

Once the money is in your account, you can typically start buying investments. Depending on the firm, this could happen in as little as a day or as long as a week or more.

You may have the option to choose whether to invest your money directly or to deposit it in a settlement fund. 

Settlement fund

A settlement fund is usually a cash account at the brokerage firm. When your money is in the settlement fund, it may not be invested. If it is invested, it’s usually in a fairly safe investment such as a money market fund. 

Essentially, it’s a middle ground between your bank account and being fully invested.

Money can stay in your settlement fund until you’re ready to make a trade. 

Keeping money in the settlement fund can allow you to make trades faster. This happens because you don’t have to wait for the money to transfer from your bank account.

4. Selecting Beneficiaries

When you open your account, you can set up beneficiaries. This information tells the brokerage firm who should get the investments in the account if you pass away. 

Some state laws require your spouse to be your beneficiary in certain circumstances. You may have to get your spouse to sign paperwork to name a different beneficiary in these cases.

Beneficiary designations often supersede your will, so make sure it is accurate based on how you want your money to be passed down. 

Check and update your beneficiaries once per year, if necessary.

What to Know If You Choose a Robo-Advisor

Some people may not feel comfortable making investment decisions on their own.

Robo-advisors are a type of brokerage firm that can help you invest using technology instead of a human financial advisor.

When you’re setting up a brokerage account at a robo-advisor, they generally ask more questions.

Why?

They want to get to know you, your investing goals and your risk tolerance.

They normally do this by asking a series of questions about your situation and feelings toward investing.

Robo-advisors may help match your investments to your timelines, as well. 

They may even ask how you feel about social and environmental issues. This can help the firm figure out if you’d prefer to invest in environmentally and socially conscious companies.

Set and forget

Based on all of this information, they typically suggest a portfolio of investments for you to invest in.

Robo-advisors may also provide other value-added services, such as rebalancing your portfolio and tax-loss harvesting.

Their services come at a cost. Most charge a yearly fee as a percentage of the assets they manage for you.

For instance, Betterment charges 0.25% of the assets they manage for you if you use their digital subscription.

Wrapping Up

Opening a brokerage account isn’t hard. You need to research brokerage firms to make sure they offer the investments and options you want. 

Once you find a brokerage firm, opening an account is usually as easy as taking a few minutes to fill out the required paperwork. 

Then, you have to wait for your funds to be deposited into your account. 

After the money arrives, you can start making trades to build your portfolio.