Luisa Rollenhagen is a journalist and investor who writes about financial planning for Wealthsimple. She is a past winner of the David James Burrell Prize for journalistic achievement and her work has been published in GQ Magazine and BuzzFeed. Luisa earned her M.A. in Journalism at New York University and is now based in Berlin, Germany.
At its core, a brokerage account holds the cash you need to buy securities. But finding the account that’s right for you is a matter of knowing your investment style.
What is a brokerage account
Just like you need a checking account to hold your cash for everyday expenses like groceries and bills, you need a brokerage account to hold the cash you use to buy assets such as stocks and bonds. Of course a brokerage account isn’t the only way to invest—more on that in a but, but if you’re planning to use a brokerage to buy and trade stocks, then you’ll need to open a brokerage account where you can deposit money, or link it to a checking account, so you can buy and sell stocks and bonds and pay fees like brokerage commissions.
Not all brokerage accounts are created equal, and they’ll often have different fees depending on their range of services. If you choose to go with a financial planner, you’ll probably be paying quite a bit extra for all of that bespoke investment advice and curated portfolio management. These high-end brokerages will have accounts that will probably feature advisory fees in addition to commission fees, so make sure to get a full overview of all fees before opening an account.
Many investors choose the convenience and comparatively lower fees of an online brokerage instead, which means you can open a brokerage account and start buying and selling assets from your laptop, right in the comfort of your own home. The nice thing about online brokerage accounts is that their low costs lower the barrier of entry for first-time investors and have lower account minimums (the minimum amount of money you have to have in your brokerage account at all times). Some online brokerages are basically just trading platforms where you can sign up for an account, and have added bonuses like commission-free trading and no account minimums.
How to open a brokerage account
The first thing you'll have to do is decide whether you want to go with a financial planner, a traditional brokerage company, or an online brokerage. If you're going with the more traditional route, you'll have to set up a meeting at the brokerage to open an account. If you're going the online route, it's very simple: You typically just need to complete an online application, similar to opening an online bank account. You'll also need to deposit or transfer some funds in order to fill your account and begin investing.
While the logistical aspects of opening a brokerage account are quite easy, you should really think about what kind of investing style you'll want to pursue while choosing an account. It all depends on what level of hands-on service you’re looking for, and whether you want to be more actively involved in the everyday management of your portfolio by trading stocks, or whether you want to go the passive investment route and build up a diversified portfolio and let it grow—after all, studies have shown that patience can pay off: Stocks held for 10 or more years are more likely to yield positive returns that offset short term risks. But again, there are no guarantees when it comes to investing, so you need to decide what you’re comfortable with. It all depends on your tolerance for risk and how much time and effort you’re willing to spend researching market conditions and company profiles, as well as what you’re long-term goals are.
Most people want to invest to build up lifelong savings, especially for retirement. In that case, passive investing with automated contributions and no withdrawals tends to be the preferred method for wealth building. But either way, always know that there’s an inherent level of risk involved whenever you’re investing, and past performances of a certain stock or market are not indicative of future ones.
So what can you buy with your brokerage account? Most brokerages will let you buy basically whatever securities you can usually invest in, including stocks, bonds, real estate investments, mutual funds, and ETFs, therefore giving you broad market exposure and allowing you to diversify your portfolio.
Brokerage accounts for minors
Although the brokerage accounts we’ve been talking about thus far are mostly referring to individual accounts, meaning that they’re opened and managed by you, for the purpose of your own investing activities, enterprising parents can also get their kids into the investing game through a "custodial" brokerage account.
Since most brokerages won’t let minors open accounts directly—perhaps for fear that they’ll put all their money into Nintendo stock—, parents and guardians have the option to open one for them and administer them in their name. It should probably go without saying that this is a pretty big responsibility, and once you open that account on your child’s behalf you’re entering a fiduciary relationship with them, meaning that you have to invest and manage the money in the account in the child’s best interest (which we’re hoping you’d be doing anyway). Apart from that, there aren’t any major differences or restrictions to an individual brokerage account, and it can be a great way to introduce your kid to the responsibilities and goals of investing at a young age. Once the child turns of legal age, the account is turned over to them.
How does a brokerage account work
Setting up a brokerage account is pretty simple. First, you’ll need to choose a brokerage where you want to open the account. As we mentioned before, keep in mind fees, perks, and your own investment style while choosing the right brokerage. Once you know where you want to open the account, you can usually sign up online (if you’re going the online route) by providing some type of personal information (such as SSN or tax ID number, official government ID, etc) and adding money to your account (often through direct deposit).
Now you’ll have to decide what you’re investing in. If you’re building your portfolio yourself, you’ll have to do some pretty in-depth research to understand what you’re buying. If you’re being guided by a financial advisor, be prepared for those hefty fees.
Once you’ve assembled your portfolio, it’s important to keep your account active with regular contributions. Some accounts require a certain minimum amount in contributions each month, so make sure to look into that before you sign up anywhere. Often, regularly investing a set amount of money allows you to benefit from the magic of compounding, which can lead to incremental growth of your invested money. Many accounts will allow you to set up automated regular deposits so you can literally set it and forget it.
Managed account versus brokerage account
We talked a little bit about different investment styles, and what kinds of fees can be associated with different kinds of accounts. With a brokerage account, you’re usually managing it yourself in some form. That means you’re doing the research about what kind of securities you want to buy, how many you want to buy, and when and if you want to sell them. The brokerage executes the trade for you, but what you purchase is mostly up to you (or your handsomely paid financial advisor). This gives you a lot of control over how your money is being invested, but it also comes with some significant risk and requires a lot of research and time on your part.
For those who’d rather not deal with that kind of stress, there’s always the managed account. While an account managed by a financial manager or advisor is accompanied with astronomical fees, the Internet has bestowed upon us a more economical (and accessible) alternative: the robo-advisor.
No, unfortunately this is not (yet) a Blade Runner-esque android who’s a stock market whiz and makes you rich by discovering the next Apple. But what a robo-advisor does do is use an algorithm, generated from answers you’ve given regarding your risk tolerance, financial goals, age, profession, and income, to generate a personalized portfolio and manage for you. So while you sacrifice control over what securities you buy and sell and can’t really focus on one specific section, your money is often spread out across a market quite evenly, since robo-advisors tend to invest in low-fee ETFs.
Brokerage account vs IRA
Featured snippet: As we’ve mentioned before, one of the main reasons people invest is to save for long-term goals, such as retirement. While it might be tempting to use your brokerage account for your retirement savings, an IRA might be a better choice for one reason in particular: an IRA is tax-deferred.
What that means is that whatever is in your brokerage account is taxable for the tax year, whereas whatever is in your IRA is tax-free until you start withdrawing from it. This means that an IRA will allow your earnings to grow over time without being taxed, while a brokerage account is taxable in the moment but does earn you greater flexibility and freedom in deciding how to manage your money and when to withdraw it. Again, it’s all a matter of evaluating what your financial goals are, and what options might suit you best.
If all this talk about brokerage accounts sounds too stressful, there’s an easier way to get started with investing. Wealthsimple is an automated investing service that allows you to reap the benefits of a managed portfolio while still offering personalized support at low fees.
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