When you’re choosing a broker, think about your investing style. Are you interested in staying on top of the markets every day? Or are you more of a set it and forget it type of investor? For the latter, you should take a good look at a financial advisor, or a robo-advisory service. Roboadvisors have you take a short survey of your time horizon and appetite for risk, and state how much you plan to invest. If you’re investing for retirement, and that date is decades in the future, you might be more willing to invest in riskier asset classes than if you need to use your investments in three years.
Also consider the types of assets you’re comfortable trading. Most investors hold stock, exchange traded funds (ETFs), and/or mutual funds. If you’re looking at trading options, there are a number of self-directed online brokers with a wide range of tools that can help you choose appropriate strategies. Though trading options is considered riskier than trading stocks and ETFs, there are some very conservative strategies designed to generate income that you can learn about with Investopedia's Options Basics tutorial.
After you’ve settled on a broker, you still have to deal with the formality of opening an account.
Fortunately, most U.S.-based online brokers have the capability of allowing you to open a new account on their website or via their mobile app. If you’re uncomfortable providing this kind of information online, you can download and print out a paper application, which you’ll have to fill in and mail back, but that can delay establishing your account by at least a week. You could also walk into a branch of one of the brokers with a brick-and-mortar presence and open your account in person. However, the sites set up by brokers have a great deal of security built in, and they also provide the fastest way of opening and funding an account.
Prior to hitting the “Open an Account” button, decide whether you are opening a regular taxable account, or an individual retirement account (IRA). You’ll also have to decide whether you’re opening an account for yourself on your own, or if there will be other owners (such as a spouse or a child) who can also log in.
No matter which firm or type of account you choose, there is some information you’ll need to have on hand before you start the account opening process. You’ll need basic data about yourself such as your social security number, date of birth, and address, but you’ll also be asked some questions about the nature of your employment. If you’re a U.S. resident but not a citizen, you’ll need to have your passport and residency visa handy.
Brokers are required to collect some other information so they can keep up with a set of rules referred to as “Know your customer,” which are intended to prevent money laundering and the funding of terrorism. They also need to make sure that you are who you say you are in order to avoid being involved in identity theft. Some of the questions may seem nosy in nature, but brokers must make these queries.
Though brokers are all collecting essentially the same information from new account holders, the design differs from one site to another. For instance, at Schwab and Fidelity, you start the process by selecting the type of account you’re opening.
Here’s what you’ll see when you click the “Open an Account” button at Schwab. They promise it won’t take long – about 10 minutes.
And here is Fidelity’s account opening screen. Again, note the assurance that you won’t spend hours dealing with the electronic paperwork.
Merrill Edge’s account opening screen emphasizes their retirement accounts, but makes no promises about the ease of the process. They also provide links to their various advisory services.
TD Ameritrade starts off asking you for your name, contact information, and citizenship status before you choose the type of account you’d like to open. The tabs let you scroll through the 26 types of accounts available.
Once you’ve made these basic entries, you’re asked a series of questions that help the broker create a profile of your investing experience and knowledge. These questions are required by regulations that were put in place to make sure that you invest in asset classes that you understand. The regulations also control the information the broker can display to you. Brokers are allowed to offer limited types of advice to self-directed investors, so the questions they pose help them classify you.
You’ll be asked how you feel about taking financial risks, along with how long you expect to hold the investments. Your tax status – single, married filing jointly, etc. – are part of this profile, as are any other assets you hold, such as a house, a checking account, or an employer-sponsored retirement account. Don’t worry about whether your responses here are accurate to the penny or the percent. Brokers are not required to verify or update this information over the course of your relationship, but you can always go back into the profile area of the site and update your responses when your circumstances change.
Beginning investors will generally be allowed to trade stocks, exchange-traded funds, and mutual funds when they start out. In time, more complex investments such as options and futures may be made available to you if you want to learn more about them and qualify for access.
Towards the end of the process, you’ll be asked to put some cash into your account. You’ve got some options here, but by far the easiest way to go is to link a bank account to your brokerage account. You’ll need your bank’s nine-digit routing number and your account number, which is usually ten digits. You can find the routing number on a check or on your bank’s website, or by using the routing number lookup on the American Bankers Association site.
You can also write a check and mail it, but that will delay the opening of your account by a week or so. The benefit of linking a bank account to your brokerage account is the ease of moving money back and forth.
Some brokers also let you set up a regular monthly transfer of cash from checking to brokerage. I find this helpful especially for those who are funding a retirement account. Getting in the habit of making regular deposits is an ideal use of technology.
There will be some time between the opening of your account and when you can start to trade, based on how you’ve chosen to deposit money. Take that time to become more familiar with the broker’s site and mobile apps by watching introductory videos and organizing your home page. Set up a watchlist of stocks and play around with the broker’s stock and fund scanners. You should also go into your profile and define the types of emails you want to receive from your broker and their partners.
Once your deposit has made it into your new account, you can start to place some trades.
Best wishes on your investing journey!