Stock Brokerage Account

Stock Brokerage Account

Do you want to make money work for you rather than you work for money? One way to do that is through investing. You do not have to have bucket loads of money to begin investing. A small amount is enough to start creating wealth and building it over time. Some people have the notion that only rich people invest. In reality, any person (regardless of income or bank balance) who wants to become rich is the one who will invest.

There are different asset classes in which one can invest to earn meaningful returns. These asset classes include stocks, government bonds, corporate bonds, certificates of deposit, REITS, mutual funds, ETFs, and participation in retirement programs such as 401k and IRA. In order to invest in the above-mentioned areas, you need to have a brokerage account.

So what exactly is a brokerage account?

A brokerage account is an investment account into which you deposit money and then use those funds to make investments. You can deposit the money by check or electronic transfer. A brokerage account offers access to the stock market (and other investments) and the convenience of being able to manage and track all your investments from a single location or platform.

In return for giving you this access and convenience, the brokerage firm who hosts your account will charge you a fee. This fee is usually charged on a per-trade basis. Sometimes, the fee is based on the total amount of money that you invest. Depending on other value-added services that you opt for, the fee structure and amount change accordingly. In order to open a brokerage account, you must research and select a brokerage firm to work with.

Types of brokerage accounts

There are two main types of brokerage accounts: a discount brokerage account (online) and a full-service account (mostly off-line). A discount brokerage account is a low-cost basic option for someone who wants to save cost and can make his/her own investment decisions.

There is no personal broker/advisor to hold your hand or provide you with stock picks. You have to do your own research from online sources or from research reports and information that the online brokerage provides on its website. At the most, what you will get is customer service and technical support.

So, while saving money is great, the risk of making mistakes (especially if you are new to investing) is also higher because you do not have an experienced broker to inform you what to buy and sell. On the other hand, if you know what you are doing, then an online brokerage could be the way to go.

If you do not want to opt for an online brokerage, you can go for a full-service brokerage firm. In that option, you will be able to speak to a broker and make all your trades through that broker. The broker could be one person specially designated to you, or the person could sometimes change.

You can discuss your financial goals with your broker or financial advisor. Based on your requirements, the broker will recommend stocks or other investments with the appropriate risk levels. You can have this discussion over the phone or in-person. A full-service brokerage account thus gives you plenty of service. But you also pay a higher fee for that added level of service.

A recent phenomenon with full-service brokerages (and even online brokerages) has been an automated robo-advisor option. It is an automated algorithm driven program that picks investments for you without human intervention.

A word about margin accounts

At an online brokerage firm or a full-service brokerage firm, you may come across something known as a margin account. Margin is nothing but borrowed money. A regular account is known as a cash account. It involves the investor depositing money in the account and then making trades. But the time it takes to settle the trades could be a few hours or sometimes a couple of days.

Let’s imagine that you sold some shares in the morning and you see the balance in your account credit by a certain amount of dollars. Then a couple of hours later, you spot an amazing investment opportunity. So, you try to make a purchase, but you cannot do so because of insufficient balance.

The morning sale that you made still hasn’t settled and the money won’t be in your account until the next day. In such a case, you can use margin money or borrowed money to make the investment urgently before the opportunity is lost.

Margin money will cost you interest, as you are borrowing money. You may also have to put up some sort of collateral with the brokerage firm in order to get approved for a margin account. It is advised that only experienced investors should think about getting a margin account.

New and beginner investors should not opt for a margin account as it can be quite risky to trade on borrowed money. You may end up accumulating large losses and lose the collateral which you would have to put up with the brokerage firm.

Retirement accounts with your brokerage firm

You can now participate in IRA and 401k programs through your brokerage. If you already have an existing retirement account, then it may be possible to move it to your brokerage firm so that it becomes easy to manage all investments from one place.

Online discount brokerages also offer retirement account options. Also, keep in mind that IRA and other retirement accounts have tax benefits. Either you get taxed upon withdrawal or you enjoy some other benefits during the investment period. Pure investments in stocks and bonds are not tax-free (unless the bond is tax-free).

So, always give priority to your retirement fund first before making any extra investments in stocks. Retirement planning supersedes all other investment ideas.

What to look for when researching different brokerage accounts

When you research and compare various brokerage accounts, you will want to think about the following factors:

Variety of investments: This is one of the most important factors that decide the quality of any brokerage firm. The more variety of investments you have, the more possibilities you have of earning meaningful returns. Some brokerages now offer investments in power trading and cryptocurrencies.

The traditional stocks, bonds, futures, options, mutual funds, and ETFs are almost a given with most firms. If you are interested in a particular asset class, then make sure that the brokerage firm you plan to work with offers that type of investment.

Fees: How much fee you will pay for operating a brokerage account is another critical factor for an investor. Most brokerage accounts work on the principle of per-trade fee (or trade commissions) where the account holder is charged a flat fee for every trade he/she makes, whether it is a buy or a sell.

Some brokerage accounts, especially the full-service ones, charge a fee based on the total amount of money that is invested. So, if an account holder has $100,000 invested, then the company might charge him/her 2% or 3% of that amount, which works out to $2000 to $3000.

There are some incentives in terms of fees that certain brokerages offer. Some companies do not charge a fee on ETFs or mutual funds. If those two are your interests, then look for an account that will waive the trading fee on those investments.

Minimum balance requirement: Most brokerage firms will require you to have a certain minimum cash balance in your brokerage account in order to remain active. This requirement could be as low as $500 or as high as $2500. If you are going to be short on cash, then look for an option with a low or no minimum balance requirement.

Customer Service Levels: If having great technical and general support is important to you, then this point should be closely examined. When you compare various brokerage firms, test their customer service quality by giving them a call. Check what kind of resources and support is provided online.

Find out if the customer service is 24 x 7 or if there are specific times during which the support team operates. Visit the physical branch of the brokerage firm if there is one. Talk one on one to get a feel of how helpful the employees at that firm are.

Research tools: If you are going to do most of the investment research yourself, then look into what kind of research reports, charts, and tools are being offered by a prospective brokerage firm. The better the quality of information and its presentation, the easier it will be for you to make investment decisions.

Well-known brokerages

Some well-known brokerage names that are worth checking out are:

TD-Ameritrade

Ally Invest

Merrill Edge

Fidelity

Charles Schwab

E-Trade

Opening a brokerage account

Opening a brokerage account is quite simple. You can either fill out the application online and provide a few basic documents, or you can walk into a full-service firm and someone will help you open one. Normally, a brokerage account will be ready within a day or two. Feel free to contact us for more details.

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