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How to Open a Brokerage Account & How to Choose the Right Broker

how to open a brokerage account
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A few years back, opening a brokerage account was only available to the big boys. The list included corporate clients, HNW individuals, or those who could comply with the high account minimums and hefty commission fees. However, today, things are way different. The competition among brokerage companies is higher than ever. This naturally leads to more affordable and convenient options for you to choose from. Nowadays, you can open an account with a broker to trade futures, stocks, bonds, ETFs, even commission-free.

Opening a brokerage account allows you to trade independently and on-the-go various assets ranging from stocks and bonds to mutual funds and ETFs. Check out our complete guide to find out how to choose the perfect broker for your needs. You will learn about the different types of brokerage accounts and the factors to consider when choosing one. Finally, we’ll compare brokerage firms to help you find the best futures broker to open an account with.

What is a Brokerage Account?

A brokerage account is an arrangement between an investor and a brokerage service provider, upon which the account holder is allowed to deposit money and authorizes the broker to place and process trades on his behalf.

The brokerage company serves only as an intermediary that processes the trades. Meanwhile, the customer is in charge of posting and managing the orders, and all assets remain his sole ownership. The owner can buy and sell investments at any time.

Depending on the jurisdiction, the profits/losses registered by the brokerage account’s owner may be considered taxable. In the US, all capital gains must be declared as taxable income. That is why you can often hear brokerage accounts to be referred to as “taxable accounts.”

Brokerage accounts offer their holders the opportunity to trade different financial instruments, including stocks, bonds, mutual funds, futures, ETFs, etc.

Both individual and corporate clients can open brokerage accounts. Depending on the account type and the service provider’s policies, there might be different requirements and account limitations that you must comply with.

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Account Types

According to the SEC’s Investor.gov portal, brokerage accounts are divided into two groups. These are cash (where you pay the full amount of the purchased investments) and margin (where the brokerage company lends you money to buy more than you actually can).

In addition, you can also differentiate them depending on the type of service and its provider. For the rest of this section, we will focus on this differentiation in brokerage accounts.

From that perspective, there are two main types you can choose from. They are the full-service and discount brokerage accounts.

The difference is usually in the commissions and fees, account minimums, margin trading limits, supported features, execution speed, traded assets, featured investment advice or analytical tools, etc.

Moving on, let’s check out the most popular brokerage account types and how they differ from each other:

Full-service brokerage accounts

As their name suggests, full-service brokerage accounts are the complete package. They are suitable for investors who seek professional guidance and support from a personal financial advisor. Understandably, due to the complete or partial professional money management service included, these accounts are at the top of the price bracket.

Full-service brokerage accounts come in different pricing models. They may charge you advisory (a percentage of the assets under management) or commission fees.

Among the most popular full-service brokerage account providers are the popular banks, including Morgan Stanley, UBS, Merill Lynch, etc.

Aside from the big banks, there are also specialized financial advisory firms that offer such services.

Discount brokerage accounts

The popularity of discount brokerage service providers is growing by the day. Companies like Charles Schwab, E-Trade, Fidelity, Vanguard, and recently and most notably Robinhood are enjoying an exponential boom in the number of their clients.

The difference between discount brokerage accounts and the full-service ones is that they are a flexible choice for DIY investors. Most service providers provide similar benefits. For instance, commission-free investments, little-to-no account minimum requirements, online account opening, etc. Basically, everything essential, aside from professional assistance.

Discount brokerage accounts are the perfect low-cost investment choice for both beginners and professionals.

Brokerage accounts with robo-advisors

The digitalization of the financial sector paved the way for the rise of robo-advisors. This type of brokerage account provides you with the opportunity to take advantage of a professional automated financial advisor to manage your investments.

Companies like Betterment and Wealthfront allow you to optimize your performance by filling out a risk tolerance and investment goals questionnaire. After that, the software creates a portfolio of ETFs (in most cases) tailored to your preferences and goals.

Main Factors to Consider

When choosing the type of the brokerage account and the service provider, there are several essential things that you should prioritize:

The type of management that fits your needs

Your starting point should be the way your account is managed. Do you want to be in charge, or you prefer active professional management? Or maybe automated management in hopes of getting the best of both worlds?

Each of the options has its pros and cons. If you are a DIY investor and are in for the thrill, choose a discount brokerage company. When you lack the needed skills but can afford professional management services, go for a financial advisor and a full-service brokerage account. If you want to sit and observe while your investments are managed automatically and at lower fees, try out a robo-advisor.

The costs

If you are on a limited budget, then full-service brokerage accounts aren’t an option as they usually have high initial account requirements.

Consider also how frequently you plan to make trades. The more you trade, the more commissions you will be charged. In that case, a discount brokerage account is the better option as it provides a wide variety of commission-free instruments and often lacks any monthly fees.

Supported assets and additional services

Bear in mind that not all service providers support futures or bonds trading, for example. Make sure to check which assets they support and compare the offers of all service providers.

Also consider the supported features. These may include analytical tools, trading platform’s functionalities, support, a news feed, real-time trading data, and other similar things that might be important for your trading strategy.

As a general rule of thumb, all things equal equal, always go with the service provider/account type that supports a higher number of assets or more features. You never know how your trading strategy will evolve in time.

What is a Brokerage Statement?

Brokerage statements are issued by the brokerage service provider and are intended to summarize your account activity and performance for a particular period.

Most brokerage service providers issue statements on a monthly or quarterly basis. The brokerage statement provides a snapshot of the past transactions and the current value of your account. This includes how many instruments you have sold/bought during the observed period, the current allocation in your portfolio, the amount of fees you have been charged, and things like that.

The brokerage statement even goes into detail regarding each instrument in your portfolio. For example, for stocks, it can disclose the income produced by the investments, including interest, dividends, and capital gain distribution.

Depending on the brokerage company, the statements can be sent by post or by email.

Brokerage account statements are necessary because they can help you stay on track and measure where you are in the process of meeting your goals.

How to Read a Brokerage Statement

Reading a brokerage statement may not be the most exciting activity, but it is a necessary one.

When you look at your brokerage statement for the first time, you will most probably be confused about how to interpret all the information there. However, once you go through it all, everything gets much easier.

Here are the sections included in most brokerage statements:

Account information

This section features the basics: your names, the period the statement covers, account number, etc. Here you will also find contact information that you can use to report should any account changes occur.

Account summary

Here you will find a summary of your performance, including realized and unrealized gains and losses. You will also get a snapshot of the current value of your portfolio.

Portfolio detail

In this section, you will find an in-depth overview of your portfolio allocation, including all assets and their performance (estimated income, yield, ratings, etc.). You can use the portfolio detail section to figure out whether you should make any changes to the current allocation, whether your strategy is in line with your goals, which are the under- and overperformers in your portfolio, etc.

Income summary

Needless to say, you would most probably be aware of your income results by the time your official brokerage account statement is issued. However, it is still useful to take a look at it in a summarized way.

This section helps you analyze your portfolio’s performance on an asset-specific level, not only for the particular period but also on a year-to-year basis.

Daily activity

The daily activity should include all transactions that you have made throughout the observed period. Should there are any discrepancies (i.e., there are trades for which you haven’t received confirmation before), make sure to report them to your brokerage service provider.

Disclosures

As with any official document, the brokerage statement also has a disclosure section. Here you will find legal information regarding penalties, warnings, fee information, and things like that.

It is worth noting that the contents of the brokerage statement may differ slightly, depending on the service provider.

To find out more about how to read a brokerage statement, make sure to check the official list of tips of The Securities Industry and Financial Markets Association.

How to Choose a Brokerage?

The truth is that there is no universal set of rules you should adhere to. The reason is that different investors have different needs. That is why, before choosing a brokerage service provider, the main thing is to figure out what appears to be the most important characteristic for you and base your research on the things that matter the most.

  • When low commissions and account minimums are crucial, go with a discount brokerage.
  • If you want a quick and convenient procedure, go with a broker with a proven track record in serving its clients online – via a platform, mobile app, helpful support, etc.
  • In case want access to a wide variety of instruments, go with some of the market leaders.
  • For a big-money trader, seek out tailored full-service brokerage companies that will help you deal with your investments actively.
  • Assuming need professional investment advice and can afford to pay a bit more, go with a broker with a more hands-on business model.

The truth is, the industry is so well-developed that there is a solution tailored to appeal to the needs of all types of investors.

The Next Step

Once you identify what you value the most in your service provider, take a close look at the leading solution providers in that niche and compare their offers. Bear in mind that, often, even the most straightforward solution may not fit all of your criteria. In other words, always take your time to do proper research.

Above all, one of the most important things to look for is the brokerages’ reputation. This is often overlooked, but it cannot be emphasized enough. Make sure to go with licensed service providers who have a clear reputation and transparent policy. Things like asking existing users’ for their opinions, checking Trustpilot, browsing dedicated forums, and looking for awards and official recognition will help you find a credible and well-renowned brokerage company.

Online Brokerage Comparison

There are plenty of sources where you can find out how different brokerage service providers compare to each other. From independent sites and financial portals to the brokerage companies themselves and industry leaders like Nasdaq. There are tons of lists and rankings you can check out. However, in the end, it all comes to your goals and the characteristics you value the most in a brokerage company.

Below is a comparison table with a summary of the offers of the most popular brokerage service providers:

 FidelityTD AmeritradeSchwabE*Trade
Minimum deposit$0$0$0$0
Stock trading fee$0$0$0$0
Mutual funds trading fee$49.95$49.99$49.95$19.99
Commission-free ETFsYesYesYesYes
Advisor servicesYesYesYesNo
Broker assisted trades fee$32.95$44.99$25.00$25.00
AI AssistantYesYesNoNo
Desktop platformYesYesYesNo
Web platformYesYesYesYes
Mobile trading appYesYesYesYes
Trade journalYesYesYesNo
Trading platformActive Trader ProthinkorswimStreetSmart EdgePower E*Trade

Of course, the listed brokers are just a small part of the options on the market. You can use some of the comparison tools available on the web to filter out which brokerages have the best offerings, tailored to your preferences.

How to Find the Best Futures Broker

When it comes to futures brokers, things are quite different. Most brokerages limit perks like low commission fees and zero account minimums only to stock and ETF trading.

A majority of the brokers don’t even support futures trading, so it is natural to say that you will have fewer options to choose from here. However, industry leaders like Fidelity, Charles Schwab, and TD Ameritrade, all offer futures trading, so you don’t have to worry that you won’t be served right.

When looking for a futures broker, most traders start by finding out which one offers the lowest fees. We say the lowest because, with futures trading, commission-free trading is rare or non-existent.

However, costs aren’t the most important thing. There are several other things you should focus on when you look for the best futures broker:

  • The account minimum
  • Whether you should apply to trade futures
  • The available funding methods
  • Real-time quotes
  • Timely and adequate customer support
  • Platform and features
  • Number of supported instruments
  • Margin requirements

Once again, put more weight on the factors that matter to you the most.

Brokerage Account vs. IRA

Many people wonder whether it is better to open a brokerage account or an Individual Retirement Account (IRA). The short answer is that it depends on the pursued goal:

  • Open a brokerage account if you: want short-term growth from making investments, despite them being taxed.
  • Open an IRA if you: want to save for retirement and benefit from tax cuts.

Other Differences

Another main difference is the amount of taxes you will pay, and at what point they are expected to be higher. Choosing a brokerage account or a particular type of IRA also depends on the tax bracket you are in at the start of your career and right before retirement, as well as the way your tax burden is projected to change as you move through the different tiers.

That is why the truth is there is no one-size-fits-all answer here. There are many factors to consider and countless variables that may affect the choice you go with. These include the type of the brokerage account, the type of the IRA account, the fees, your age, tax bracket, etc.

To find out whether a brokerage account or an IRA is the better choice for your individual needs, the best thing to do is to consider both scenarios by using an online financial planning software or consult a professional.

Bear in mind that the answer might not even be either/or, but often you might be advised to take advantage of both. Many investors combine the advantages of taxable brokerage accounts with an active contribution to IRAs to ensure their comfortable retirement.

How to Open a Brokerage Account?

After you have figured out which brokerage company’s offering best fits your needs, the next logical step is to open an account there.

Although the procedure may differ depending on the company’s policy and the jurisdiction, in most cases, the steps you would go through are quite similar.

First Step

First of all, you will have to register and provide personal information (names, address, phone, assets, and net worth, social security number, employer identification number, etc. – not all of these might be required, while some also depend on the jurisdiction). The procedure here is similar to when you are opening a bank account.

You will have to verify this information in some way. In most cases, you will have to pass through a KYC and identity verification procedure.

Second Step

Next, you will be asked to fill out a questionnaire. The goal here is to help the broker find out more about your risk tolerance, investment goals (capital preservation, growth, speculation, etc.), the level of your financial knowledge, time horizon, and other objectives. The broker then creates something like an investor profile. That way, they can identify your risk-tolerance and base their investment advice on it (if such is required).

Final Step

The last step is to fund your account. Depending on your account type and the broker’s policy, there might be different options to choose from. In most cases, however, you will be able to fund your account through wire transfers, electronic funds transfers, writing a check, etc. Depending on the way you choose, you may have to wait a couple of days (usually no more than a week) before the money gets transferred to your account.

After you are done with all this, you will be able to place your first trade.

Things to Know Before Opening

Before opening an account, we should emphasize that it is essential that you focus on doing the last bits of research on the reputation of the service provider. Focus exclusively on the transparency and credibility of the brokerage company.  

In recent years, many brokerage firms were caught selling their users’ order flow to high-frequency trading firms and market makers, which they were fined for. Although this might not be a significant problem for small traders, it is always better to know that your brokerage service provider acts in your best interest.

It is crucial for futures traders to bear in mind that some brokers have stringent policies, and they might be required to apply and get approved before being allowed to trade.

Last but not least, before you start trading, make sure to take your time to set-up and test the platforms of the service provider with paper money. Most of the leading brokerage companies offer demo accounts, so make the most of them and taste each platform (desktop, web, and mobile version) before starting with real money.

Final Thoughts on Brokerage Accounts

To conclude, we can honestly admit that today, we are spoiled in terms of options when it comes to brokerage service providers. Therefore not only can we choose from all types of discount brokers with advanced platforms and convenient features, but we can also take advantage of trading a variety of instruments. From stocks and bonds to futures, ETFs, mutual funds, and even cryptocurrencies – today, you can trade the world from your smartphone.

Due to the ever-evolving competition in the niche, trading has become practically free. And the main winner from all this is you, the trader.

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