How do I open an investment account?

Michaela Wang (she/her); Livingston, NJ—

I remember the day of my Talk vividly: Instead of dropping me off at dance class, my parents sat me down at our local brick-and-mortar bank for a one-hour consultation. A middle-aged man, who eerily resembled a teddy bear, threw financial jargon at me while my gaze fixated on the bowl of free lollipops outside his office. Sucking on my artificial grape Dum Dum, I successfully opened a brokerage account and ushered in a new era of financial independence.

Whether they’re privileged enough to learn about investing at the age of 12 or they’re about to purchase a home at 30, everyone will one day confront the Finance Talk and unlock the door to financial independence. But, until the time comes, young people are rarely taught the language of finance in school and, thus, lack awareness of their financial agency. This crisis particularly impacts women of color: A 2019 survey by S&P Global found that only 26 percent of American women have money in the stock market. According to a 2013 study by U.S. Trust, 41 percent of women have no plans to invest that cash, compared to 31 percent of men.

In today’s column, I’ll walk you through the intrinsic first step in anyone’s investment portfolio: opening a brokerage account. 

What’s a brokerage account? 

Investors use brokerage accounts to buy and sell securities, including stocks, bonds and funds. Brokerage account providers serve as an intermediary between you and the investments you want to purchase or sell. 

There are two main types of brokerage accounts: cash accounts and margin accounts. These brokerage accounts are different because of how you purchase your investments. When you have a cash account at a brokerage, you buy securities with the money deposited in the account; if you don’t have more money in your account, you cannot buy additional stock. Whereas, with a margin account, you can borrow money to buy investments; margin accounts mean you’re taking a higher risk, but you could gain a potentially higher yield. Cash accounts suit novice investors focused on steady, long-term growth investments; you don’t want the Feds knocking on your door after you’ve failed to act on your margin call (where you liquidate your position in a stock to keep your investment).

Finally, you may see “taxable” tacked onto the term. This means investment income you earn from your brokerage account will be taxed as capital gain.

How do brokerage accounts work?

Anyone can open a brokerage account online, and you generally do not need much money to do so. Minimum deposits vary depending on the brokerage account provider: some set a minimum at $1,000 to $2,000, while many allow you to open an account with no initial deposit. Keep in mind that the brokerage may charge commissions when you buy and sell certain assets. 

Regardless of which provider you choose, you must fund the account before you can purchase any investments. So, before you settle on a brokerage firm, compare the amount you are willing to invest with commissions and minimum deposits of different providers. See the chart below in the next section.

Cash and securities in a brokerage account are insured by the Securities Investor Protection Corporation (SIPC), a federally mandated nonprofit created by federal statute in 1970, which replaces or refunds a customer’s cash and assets if a brokerage firm goes bankrupt. SIPC protects $500,000 per customer (up to $250,000 in cash), though SIPC does not protect you from a poor investment decision.

How should I choose a brokerage account provider?

  1. Discount Brokerage Account 

If you want to proactively purchase and manage your own investments, an investment account with an online brokerage company enables you to buy and sell investments through the broker’s website. Here are the five most popular brokers, according to the finance blog NerdWallet.com:

April 2021 Top 5 Brokers

BrokerCommissionAccount Minimum 
E*Trade$0 per stock$0
TD Ameritrade$0 per stock$0
J.P. Morgan Self-Directed Investing$0 per stock$0
Interactive Brokers IBKR Lite$0 per stock$0
SoFi Active Investing$0 per stock$0
  1. Managed Brokerage Account

The best way to describe managed brokerage accounts is an analogy to kale: The nutritional benefits of kale sound appealing, but you don’t actually want to spend all that time chewing a fibrous rug. Thus, you pay more money to buy vitamin supplements that provide those same exact benefits and maybe more, so your teeth can take a break. Similarly, you may be interested in monetary gains, but you would rather rely on someone else to make the heavy-handed decisions in which stocks to invest. 

  • Full-Time Service 

Traditional full-time service brokers give you a list of potential investments individualized to your preferred investment strategy. The broker will also prepare a report about your portfolio and even grant you access to certain institutional-grade mutual funds, index funds or exchange-traded funds that you otherwise would not be able to buy.

  • Robo-Advisor

Thanks to computer automation, robo-advisors can manage your investments for you using algorithms. Relative to human investment managers, robo-advisors charge low fees — a robo-advisor typically costs 0.25 percent to 0.50 percent of your account balance per year, and many allow you to open an account with no minimum. 

Whichever method you ultimately decide — managed brokerage account or discount broker — is not binding: There are no limits to how many brokerage accounts you may open or how much money you deposit in a year. 

How do I open a brokerage account?

Aside from a possible minimum deposit, you’ll also need to provide personal information to open a brokerage account, such as: 

  • A Social Security number or a Tax Identification Number
  • A driver’s license or passport, or other government-issued ID
  • Information on your employment status
  • Financial information, such as your annual income and net worth
  • A basic overview of your investment objectives 

Though opening a brokerage account may seem straightforward, I recommend conducting independent research on different brokerages and evaluating your financial status with a trusted adult.  

Congratulations, you are officially commenced into the world of personal finance! Tune in, in the coming weeks to read about the next step in the investment process: investing. I’ll teach you different types of investments and how you can tailor investment strategies to your financial goals and resources. I’m so excited to grow and learn along with you.

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