If you want to invest money over and above what you can sock away in your 401(k) or Roth IRA, you'll probably need to open a brokerage account. This type of account lets you trade investments, but there are several things to consider before you open one.
Find out what you need to know before you open a brokerage account so that you can choose a firm that aligns with your goals.
Choosing a Brokerage
The type of brokerage you choose will determine your available options and the level of service you receive.
Full-Service vs. Discount Brokers
There are two types of stockbrokers: full-service and discount brokers.
Full-service or traditional brokers work closely with you, answering your phone calls and questions, placing your trades for you, and even recommending investments. They may prepare reports for you to giving you a rundown on your portfolio's performance. They may also be able to give you access to exclusive, institutional-grade funds you otherwise might not otherwise be able to access.
Full-service brokers charge you a commission for their services, making this option cost several times more than a discount brokerage. These fees also generate sizable profits for brokers. While a $250 commission is affordable for investors who are buying blue-chip stocks in $500,000 blocks, fees like that can really eat into your returns if you have a smaller account.
Some traditional brokerage firms work on hybrid compensation models that blend fixed fees, annual fees as a percentage of assets, and trading commissions. Additional services are often included in these costs and will vary from broker to broker.
A discount broker, in contrast, provides you with the tools to execute your own trades. You handle the buy and sell orders. There is no one standing between you and your money, which can be convenient if you're in a hurry. On the other hand, there's no one to stop you from making risky moves, such as selling out during a panic or buying on margin during a boom.
For professional or experienced investors who manage their own money, discount brokers are ideal, because investors won't have to for services they don't need.
Some brokerage firms offer both traditional and discount brokerage accounts to investors, allowing them to choose which type works better.
Margin Account vs. Cash Account
In addition to types of brokerages, there are two types of accounts you can hold at a brokerage: margin accounts and cash accounts.
Margin accounts let you borrow money in order to make a trade. Cash accounts require you to have the amount of the trade available in cash before you make the trade. Buying stock on margin exposes you to risk.
If you are going to trade on margin, you may want to see how the brokerage account structures its margin terms (e.g., some stock traders want a more advanced form of margin calculation known as "portfolio margin" in their brokerage account), and the rates at which margin loans are extended.
After the financial crisis of 2008, many experts are concerned that rehypothecation (which uses loans as collateral for other loans) could become a disaster under the wrong circumstances. Opening a cash account eliminates that risk.
Brokerage Account Minimums
Different brokerage accounts have different opening-balance requirements. Some brokerage firms will set a minimum at $1,000, $2,000, or more. Others may allow you to open an account with a smaller amount of money as long as you agree to have money deposited regularly, often on a monthly basis, from a linked checking or savings account.
Increasingly, many require no minimum deposit at all. Charles Schwab, for example, requires no account minimum and no minimum opening balance. If you fail to maintain the minimum opening balance or some other minimum balance requirements, be sure to consider the fees you'll likely incur.
Brokerage Account Services, Perks, and Tools
You'll encounter a wide range of perks and research tools, depending on the broker. Some deliver free access to equity and mutual fund research data from Morningstar, Thomson Reuters, Standard & Poor's, Credit Suisse, and other institutions such as investment banks.
Others have deals with major credit card companies to provide offerings not available to the general public. For example, American Express and Charles Schwab joined together to allow cardholders to receive benefits based upon their total Schwab brokerage account size, including cash rewards deposited into the linked brokerage account.
Some brokerages also will help you to invest commission-free in select securities, such as exclusive mutual funds. For small investors working on a shoestring budget, this can be a great way to save money.
Will You Use the App or Website?
If you plan on doing a lot of your research or trading online, be sure to visit the website of the brokerages you're considering. The feel and usability of the site will be almost as important as the other benefits and services offered.
Some brokerage houses have been notorious for site outages during periods of high market volatility or trading. Others send brokerage account owners through a maze of recorded messages before reaching a live person on the phone.
If you're more of an app user, be sure a brokerage's app works with your device and is comfortable and convenient to use.
What to Expect After Opening Your Brokerage Account
Once you've opened your account, you can expect to begin receiving account statements. You might receive a paper statement in the mail or an electronic statement or both.
You can also view your brokerage account trade confirmations. This allows you to make sure the trades are being carried out as you intended, and it gives you a chance to correct any errors if they occur.