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.