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If you want to invest in the stock market, you should start by opening a brokerage account. There are several types of such accounts, each with different available tools and benefits. Opening the right one can be just as important as opening one at all.
What is a brokerage account?
A brokerage account is a type of investment account that you open with a brokerage firm. You deposit money into the account, which is then used to invest. At the cost of a commission fee, the brokerage firm can also help you place your investments.
One of the benefits of opening such an account is the access it provides to various types of investments, including bonds, stocks, index funds, exchange-traded funds and mutual funds. “Many brokers also offer more complex investments, like options, forex or futures, as well as safer investments like CDs, bonds and cash management accounts,” Arielle O’Shea, an investment and retirement writer, explains in an April 2019 article for NerdWallet.
What are the types of brokerage accounts?
There are three major types of brokerage accounts. The one you should choose will depend on your long- and short-term investment goals, the kind of investments you want to make and the amount of help you need choosing and managing investments.
A common type of brokerage account is an online or discount account. “These companies allow investors to purchase and trade investments on their own, through online trading platforms,” O’Shea explains. If you want to purchase and manage your own investments, this is the way to go.
Another type is a managed or full-service brokerage account. These accounts come with either a human investment advisor or a robo-advisor that uses computer algorithms to choose and manage investments for you. “Robo-advisors present you with a short survey of your time horizon and appetite for risk, and ask you to state how much you plan to invest,” Theresa W. Carey, an investing and brokerage expert, writes in a March 2019 article for Investopedia.
If you are investing for retirement, you should consider a retirement brokerage account, which will have tax advantages specifically designed to help you save for the future. The downside is that, like with Roth or traditional IRA accounts, there are restrictions on when and how you can withdraw the money before reaching retirement age.
How to choose a brokerage account
Once you have decided what kind of brokerage account you want, it’s time to choose an account provider. Avoid accounts that come with opening fees or require a minimum deposit, and look for accounts that offer features you want. For instance, many brokers offer access to their own stock ratings as well as to third-party research. Others allow you to convert your money into foreign currencies to trade on international stock exchanges.
Convenience is also a factor. If you value the ability to get face-to-face investment guidance, you should look at big brokerages that have large networks of local branch offices. Brokerages offer a wide variety of trading software and mobile apps; some will even allow you to test these before you commit.
Ultimately, you have a lot of choices available to you, so take the time to shop around. “Look for a broker who has research and education features that can help you grow as an investor, especially if you are new to investing,” Carey recommends.
Open an account
Fortunately, setting up a brokerage account is the easiest part of the whole process. Once you’ve decided on a brokerage firm, the online application process can take less than 15 minutes to complete. You will need identifying information like a driver’s license and Social Security number, and the broker will need information about your investment goals and assets as well as your employment status and net worth. “Once you’ve opened the investment account, you’ll need to initiate a deposit or funds transfer,” O’Shea writes. “The funds transfer process can take anywhere from a few days to a week. Once that is complete, you can begin investing.”
Opening a brokerage account is just the first step toward investing in the stock market, but opening the right one can go a long way toward improving your investment experience. Shop around before opening an account, and consider consulting a financial professional before pulling the trigger.