For those who have decided to invest their hard-earned money in stocks and commodities, opening a brokerage account is going to be your first step to entering the investment market. An investment account is completely different from the bank account (where the regular monetary transaction takes place).
When you open an investment account, you become eligible to purchase stocks, mutual funds, and bonds. You cannot purchase stocks or other investment products without opening a valid brokerage account.
There are different types of brokerage accounts on the market. While some offer costlier yet full brokerage services, others charge a reasonable rate for high-quality brokerage service.
In this post, we’ll walk you through the meaning of the brokerage account and the steps to open one. Let’s start with the meaning.
A brokerage account is used to purchase investment products. You can open this account with a licensed brokerage firm or an investment company. As soon as your account is approved and your deposit the money, you can purchase stocks and other investment products.
You can use the deposited money to purchase investment. Once you purchase the investment, you become the owner of it. The purchased stocks can be sold anytime. In simple terms, the broker acts as the middleman who connects you to the investment companies and provides a platform for stock trading.
Brokerage account will allow you to purchase different types of investment products ranging from stocks to mutual bonds.
Mostly, the brokerage firm or investment company will allow you to open a trading account easily. To fund this account, you need to deposit money from your savings account to the brokerage account.
The process might take up to weeks. The user can switch their brokerage firms if they are unhappy with the current company. You can even transfer all your investments and money from one brokerage account to another.
Users don’t need a significant amount of money to create an account with a reputable brokerage firm. In fact, some companies allow you to get your brokerage account set up without an initial deposit. But, you will need to deposit money for purchasing investments.
Make sure that the brokerage account does not involve any fee. Even though these firms simplify your investment process and provide a flexible trading service, they charge no fee. Moreover, you can open as many brokerage accounts as you want.
A typical brokerage account is also known as a taxable account. That said, you don’t get to receive any tax benefits from such accounts.
Mostly, the tax is charged on your yearly profits. As an advantage, you get to withdraw your earnings anytime you want. Plus, there is no limit on buying investments.
However, a taxable account isn’t a suitable option for individuals who are investing in their retirement. There’s a special retirement account such as IRA, which is mainly developed to benefit the user whose sole purpose of investment is retirement savings. These are tax-saving accounts. But, they also come with certain limitations such as how much you can deposit every year, when you can pull out the money, etc.
You will want to reconsider your choice if you are opening an account for retirement purposes. Since the IRA account offers a tax-saving advantage, it can be the best option for investors.
At the same time, your money will be invested for several years (5-10). So, choose wisely.
Now that you have decided which account amongst – taxable brokerage and Retirement account – you want to open, it is time to pick the service provider. Currently, Robo-advisors and online brokers are in high demand. Let’s see which one can fit your requirements.
- Online Brokerage Account
Do you want to invest and handle your money on your own? If yes, then an online brokerage account can be a perfect choice.
By opening an investment account with a licensed brokerage firm, you can purchase and sell investment products through their website.
- Managed Brokerage Account
Managed investment accounts either involve a human advisor or a Robo-advisor. It is a perfect option for beginners who are not familiar with brokerage platforms and investment products. The Robo-advisors are less costly than a human investment manager.
These companies use advanced computer algorithms to pick the right investment option considering your risk portfolio and investment objectives.
Opening a brokerage account is as simple as completing a short application form (which takes around 10-15 minutes to complete). As soon as your investment account starts, you can fund it by depositing a certain amount of money.
You don’t have to worry about the account opening or funding process since the broker will guide you throughout the process. Once you have deposited the money, you can purchase investments.
While opening an account, the firm asks the user if they want to stick to the cash account or open a margin account. A margin account may seem a reliable option, however, it comes with its share of risks.
While it lets the user borrow a certain amount of money from the broker to purchase stocks or mutual funds, the user might end up paying a heavy interest rate or broker fee in return. That being said, it is best to choose the cash account (especially, if you are new to the investment world).
The stock market might be the most unpredictable markets. But, it gives you the long-term benefit by multiplying your investment in a short period. Not everyone is ready to invest a significant portion of their earnings for retirement life.
After all, the stock market is all about uncertainty and risks. Some people want to have cash in hand to stay prepared for the unforeseen expenses. Sure, you must have some cash in hand.
Note that stock investment is a viable option for those who are ready to bear the risk and secure their financial future or life after retirement.