The first step towards buying stocks, mutual funds, and bonds is opening a brokerage account. You can transfer money in and out of a brokerage, just like a bank, but it’s different because you get access to the stock market and other investments. This article is a step-by-step guide on how to choose a brokerage account.

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1. Determine the type of brokerage account that suits your needs

When choosing an account that fits your needs, there are some things you need to consider. They include:

What are your investment objectives?

If you’re new to investing, you may be confused about whether to open a brokerage account or a retirement account. Should your goal be short-term investing, then choose a traditional brokerage account. If it’s long-term, then you’d want to consider a retirement account, for example, a 401(k), RRSP, or Roth IRA. It’s essential to know the difference between the two.

Traditional brokerage accounts don’t have tax advantages, but you can withdraw your money whenever you wish. Your broker will ask you if you want a margin or cash account. That means you will have the ability to borrow money to buy stocks, and the stocks in your portfolio will act as collateral. You’ll have to pay interest on the money you borrow, among other inherent risks that come with investing on margin.

On the other hand, retirement accounts offer tax deductions, but you can’t access the money anytime you like. Qualified Roth IRA withdrawals are tax-free, and you can withdraw contributions, but not profits, whenever you want. If you’re self-employed, a 410(K) is a great choice.

Are you an active or passive investor?

Will you hold a few investments long-term with little or no day-to-day trading? The main difference is that an active investor tries to beat the market, but a passive investor mainly tracks a market index. A hands-on approach is necessary for active investing, which may include the assistance of a portfolio manager.

There is less buying and selling for passive investing, resulting in investors buying index funds among other mutual funds. Passive investors mostly garner more investment flows. Active investing has also grown in popularity recently, mostly during market upheavals.

What type of service do you need?

A discount broker will handle buying and selling orders at a lower commission rate than a full-service broker. A full-service broker will provide investment advice or perform a market analysis on your behalf, but a discount broker won’t do that.

2. Compare the basic brokerage features

A good brokerage account should include several features. When choosing a brokerage account, consider if it offers you the following.

Accessibility and support

• This should be available even for online brokers. It should be easy and fast to get help from the company during trading hours if you have any inquiries, and there should also be 24/7 chat assistance. Long-term success depends on accessibility and support, as it shows the company is serious about maintaining existing and new investors.

Diverse investment options

• A diversified portfolio reduces risks while investing in the long term. It gives you a certain amount of high-return investments by offsetting any possible risks using stable alternatives. Choose an account with different investment options such as ETFs, individual stocks, bonds, and fractional shares.

Ease of depositing and withdrawing funds

• Start by checking what options are available for depositing funds, such as wire transfer, electronic fund transfer (EFT), checks, or asset transfer if you’re planning on transferring investments from a different broker. You should be able to settle your security transaction in three business days. This process is a settlement cycle known as “T+3” (trade plus three days). The brokerage firm should receive your payment in a period that doesn’t exceed three business days after executing a trade. Check how easy it is to withdraw from a brokerage account, and the number of days taken for deposited funds to be available for investing, as well as whether there are withdrawal fees.

Online security and protection

• Be aware of the many dangers, including identity thieves, phishers, hackers, or snoops. Therefore, a brokerage account needs to offer security and protection against such criminals. It can be either through two-factor authentication among other forms of security. When doing online transactions, ensure your brokerage utilizes high-end encryption.

Access to research

• An organization should offer access to third-party market research, and others may even provide stock ratings. This additional information brings about a new approach that can provide many benefits, including innovative and fresh ideas. Performance analysis of different securities helps find the proper value of individual securities, i.e., stocks and bonds.

The Broker’s platform experience

• The web and mobile layout should be intuitively organized. You’re able to get easy access to valuable and vital information without having to look hard for it. Ensure the website has proper navigation tools.

3. Compare the fees and costs

Almost all of the major discount brokers do offer commission-free trading nowadays. Some brokers may provide discounts to reward you for different actions, such as transferring a large investment account from another broker. Therefore it’s essential to review a brokerage firm’s fees and costs if you’re looking to trade anything other than stocks such as options, bonds, or ETFs, among others.

Other brokers also offer incentives to attract clients, and the good thing is you don’t need to be a millionaire to benefit. Your entire decision shouldn’t rely on a single incentive, but it’s worth serious consideration at the very least. Some fees you should be aware of include:

• Broker account fees: ensure you find out what the minimum deposit is, fees charged for opening an account, fund transfer/withdrawal fees, account activity fees, and annual fees.

• Trading commissions: a commission is a fee you pay each time you make a trade. Commission-free trading is becoming a standard for online stock trading because there’s no charge for placing a stock or ETF trading. However, you should note that there might be trading costs if you trade securities other than stocks, including mutual funds, options, bonds, etc.

4. Decide on a brokerage firm and fill out the application

Choose a brokerage firm after finding out which account fits your needs, services, and fees. For each brokerage you’re considering, it’s essential to weigh all of the pros and cons as these relate to your investment goals. You will quickly determine which broker is good for you, and it would be best to analyze your investing style first. Keep the following points in mind when choosing a brokerage firm:

• Consider your investment style and match it with a brokerage firm that will be able to charge the least amount of money for the services you’ll likely be using very often.

• Compare all of the costs involved in buying, selling, and holding stocks, among other securities, through the firm. Don’t just look at the commission, and make sure to compare additional fees such as service charges and margin interest.

• Try and use brokerage comparison services available in different financial publications and online.

After choosing a brokerage firm, you proceed to fill out the new account application form. You can apply to open a new account online. Completing the application online is a much quicker and painless option when dealing with online brokers. 

Ensure you have your identity information, such as your driver’s license or social security number, because that will be required. 

You might also be required to sign some additional forms if you intend to request margin privileges, as well as the ability to trade options. If so, the broker will need to collect information regarding your investment goals, net worth, employment status, and investable assets.

5. Fund the account and start investing

Your brokerage will probably offer a few options to fund your account by your new online broker. Some of the options include:

• Cheques: different brokers vary between acceptable forms of cheque deposits and fund availability. Check with your online broker to find out what they prefer.

• Electronic fund transfers (EFT): a convenient way to fund your account is to transfer funds from a savings or linked checking account. On most occasions, the funds will reflect in the account the following business day.

• Asset transfer: it’s an acceptable funding method if you want to transfer existing investments from another broker or roll over a 401(k).

• Wire transfer: this is one of the quickest ways to fund your brokerage account, therefore a great choice. A wire transfer involves a direct bank-to-bank transfer of funds, and it will only take a few minutes for your transfer to be complete.

• Stock certificates: If you thought these did not exist anymore, lo and behold, they still do. You can deposit it into an online brokerage account via email when you have a paper stock certificate.

As a final note, you should remember that funding the account does not mean you have investments in the market. You have to research and buy assets. Ensure you also keep your broker’s minimums in mind. Different brokers have different minimums for retirement accounts and taxable accounts and other requirements for margin accounts.