You’ve decided to open an online brokerage account and start your investing journey. Good decision!
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. There are a few things to consider before you hit that “Open an Account” link.
- Choose the Type of Brokerage Account You Need
- Consider the Features You Want and Their Associated Costs
- Choose the Brokerage That Best Fits Your Desired Needs
- Begin the Application Process
- Fund Your New Account and Start Investing
Step 1: Choose the Type of Brokerage Account You Need
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?
If you want to stay engaged in the markets, consider the types of assets you’re comfortable trading, or want to learn to trade. 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.
Many brokers let you invest in fixed income securities online, and have bond screeners and other tools to help you build a portfolio.
For those who want to invest money but not time in building wealth, you should take a good look at a financial advisor, or a robo-advisory service. 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. 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.
You’ll also need to decide whether you are opening a regular taxable account, or an individual retirement account (IRA). Another decision involves the ownership of the account: are you 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. If you’re opening an account to help a minor save for a college education, you may open a custodial account or a tax-advantaged tuition account often referred to as a 529 Savings Account.
We can help you sort through the array of brokers available. Visit our Best Online Brokers Awards center for detailed reviews of dozens of U.S.-based brokerages. There we provide the lists of Best Brokers for a variety of investing needs and preferences, including Best Brokers for ETFs and Best Brokers for IRAs.
Step 2: Consider the Features You Want and Their Associated Costs
There is a great deal of focus on the standard commissions for placing a stock trade, but there is more to investing with an online broker than fees. Be wary of “free” trades, keeping in mind that you don’t get what you don’t pay for. Research and news features are light (and sometimes non-existent) and you will likely get less-than-optimal fills for your transactions since the broker has to make money somewhere. Free trades are generally paid for by routing to market makers, who pay the broker for the order flow, but who do not prioritize price improvement. Zero-fee brokers might be a good place for investors with small accounts who are only trading a few shares at a time.
So 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. Check out our list of Best Brokers for Beginners as a starting point. This group is recognized based on their educational resources, easy navigation, clear commission and pricing structures, portfolio construction tools and research.
3. Choose the Brokerage That Best Fits Your Desired Needs
Don’t hesitate to use the Chat function provided by many of the brokers to ask more in-depth questions of their support representatives. You may end up calling a support line for new customers, which will give you the opportunity to check out the quality of the help provided. This is a good time to go through the frequently-asked questions (FAQs) on brokers’ sites as well, to make sure you won’t face any surprises.
Once you’ve made up your mind, click “Open an Account,” and get started!
4. Begin the Application Process
After you’ve settled on a broker, you still have to deal with the formality of opening an account.
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 and other account holders, such as 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 client,” 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 that help the firm create a profile of your investing experience and knowledge, 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. You'll be asked for a range of your annual income as well. 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, especially if you want to access additional asset classes.
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 websites 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.
Though brokers are all collecting essentially the same information from new account holders, the design differs from one site to another. The entire process, once you’ve got all the required information gathered, shouldn’t take much more than 15 minutes.
5. Fund Your New Account and Start Investing
Once your account is open, you’ll be able to establish your online credentials – user ID and password – for logging on.
To get started trading, you’ll need 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. U.S.-based brokers, by regulation, will not allow you to fund a brokerage account using a credit card.
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 or saving for a particular goal. Getting in the habit of making regular deposits is an ideal use of technology.
There will be some time, one day to seven days, 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.
Most brokers now charge a small fee, $1-2 monthly, to send paper statements and confirmations, but you can opt in to electronic notifications and avoid those fees. You should also go into your profile and define the types of emails and snail mails 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.