Want to start trading online? Set yourself up for success by selecting a broker that understands your needs. We’ve considered the best online brokers based on commissions, account minimums, ease of use, and overall quality.
Who should use a brokerage account?
Brokerage accounts should be explored as an opportunity to invest. The stock market does not have guarantees of growth but offers potential. A few of the investment types are:
- Stocks: Publicly traded companies allow individuals to purchase shares of the company.
- Bonds: Payback the original investment plus the interest based on the prime rate when the bond was issued.
- Mutual funds: A conglomerate of stocks combined into one purchase, if one stock fails it will not lose all the money invested. These types of funds are managed on the back end by a team.
- ETFs: A conglomerate of stocks, like a mutual fund, without a management team.
Investing is like gambling, invest with the potential it could be lost. Brokerage account types may differ by State, but common ones are:
- Single: One individual owns the account.
- Joint: Typical for spouses to have a joint account. Access is given to both, to make decisions on investment in the account.
- Trust: Set up by a lawyer, a trust makes the account an outside entity to an individual. Typically, one or two folks have the power to make decisions on behalf of the trust.
What do you need to open a brokerage account?
The common items needed to open a brokerage account include ID, proof of residency, and Social Security Number. Most places will require two forms of ID and a copy may be necessary. Transfer paperwork is required if making a broker-to-broker change. A piece of mail may be required, and a power or cell phone bill would suffice the required documentation for address.
What are the fees with a brokerage account?
The fees will differ depending on the brokerage firm. The fees will differ depending on the type of investment.
- Stocks: Many online brokerage firms offer free trades on stocks. Occasionally a $4.95 fee would be added as a transfer fee to Wall St. If using a brokerage advisor, the recommendations on stocks will come at a price if purchased through them.
- Bonds: Minimal cost to purchase a bond and it is determined by the purchase amount. Typically, around 0.1-1% of the bond cost.
- Mutual funds: The cost is set by the mutual fund company, not the brokerage. The more invested, the cheaper the cost. The costs differ by mutual fund company but start in the range of 5% and go down from there. A maintenance cost is assessed each year and differs by a mutual fund, this is a hidden cost not seen by the investor.
- ETF: ETFs trade like stocks and a lot of online brokers offer free trades. Like a mutual fund, they have a maintenance cost that is hidden from the investor.
What are the risks with a brokerage account?
Brokerage accounts will usually have backing by SIPC, like FDIC but for investment accounts. SIPC covers up to $500,000 in an investment account. The risks with a brokerage account are based on the types of investment risk.
- Liquidity risk: Trades have a settlement time of 2 days. This holds back cash for that time plus the transfer (1 to 3 days) to a usable bank account.
- Concentration risk: Purchasing only one stock creates a significant risk if the company becomes insolvent. Balanced investing is recommended.
- Reinvestment risk: Moving around investments often may lead to losses in potential gains.
- Inflation risk: If the investments gains are not above the inflation rate, then the spending power is less.
- Horizon risk: The amount of time horizon to hold onto an investment. Speculative investing may take years to come to fruition and being over 80 may not be suitable for this type of investment.
- Longevity risk: Short term versus long term investing. A major difference in tax rate is based on the amount of time an investment is held.
How to choose the best online broker?
Brokers will have their own unique capabilities. Choosing the best online broker comes down to the following:
- Fees: Shopping for the lowest fees is important, the stocks are the same regardless of the broker.
- Trusted broker: A trusted broker with SIPC backing is essential to protect the investments.
- Ease of access: Finding a broker with an app will help with ease of access to the account or make trades on a whim.