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Brokerage Account Basics

Advetisements

The first step in trading stock is the set up a brokerage account. A trader can learn everything they can about the stock market and how to play it well, but to put that theory into practice, they need to find a broker that’s the right fit for them. 

What is a Brokerage Account

A rookie trader might think that they can just store all their stock profits in their bank account, but they would have to think again as stocks can only be traded by those who own a brokerage account. The only people who technically don’t have to own a brokerage account on the stock market, is the brokers themselves. A brokerage account is an account for traders where they can safely deposit their funds from the stock market. It’s like a bank, except instead of storing earnings from jobs or savings, they store the money traders plan on investing, and the earnings they made back. Day traders enter contracts with brokers who managed the account to use the money for stock trading purposes only. 

Advetisements

How to open a Brokerage Account 

Setting up a brokerage account can be as easy as filling out an application online in minutes. Popular brokers people use include E*Trade, TD Ameritrade,  Interactive Brokers, Fidelity, and Trade Station. However, beyond this brokers, there’s still an abundance of firms to choose from. 

Using E*Trade as an example, to set up an account you need to select “Brokerage” on the application, and either open it as a sole trader of avail of the option to have a joint account. Next, the broker is going to require fundamental information about you such as your name, address, and contact details. Then more specific information such as your social security number, marital status, deptends, and income are needed next. After this you need to tell your broker how you intend on financing the account, as well as what your trading goals are, and relevant experience. After the application is finished, the account is up and running. It’s a similar process with other brokers. 

Make sure to shop around and look into a few different brokers before deciding which one to open your account with. In order to entice traders to open with them, companies will try to offer benefits or incentives such as access to news and information about the market, or the ability to trade without fees if the account is opened with certain minimum deposits. Other brokers might offer free advice about investing, or the facilities to paper trade and check quotes. Find one who offers benefits suited to your individual needs and wants as a trader. 

Fees

While the initial setting up of the account might be free, there’s a few costs and fees to keep in mind. 

Firstly, it costs money to trade. Brokers will need to fund the account themselves based on how much or little of their own money they’ll willing to invest. Some firms have mandatory policies about minimum initial deposits. This means the minimum amount of money determined by the broker must be in the account before you’re allowed to begin trading. However, as not all brokers do this, beginnings might be better starting with a firm without minimum deposit requirements. 

On top of this, some brokers require traders to have a certain amount of money minimum in their account to stay active. This affects those who trade on the margin. Buying and trading on margin, means that traders borrow money from the broker to buy more stock than they can normally afford, it’s a loan from the broker. Traders who do this have to accept that the broker can make a margin call, which means there needs to be enough funds in the account to support the margin that was loaned out. 

The broker needs to make a profit to stay in business, and the easiest way to do it is to charge commission per trade. The average commission taken is 7%. Traders can be smart about commission and make large trades at once rather than a series of smaller ones. For example, buying 1,000 shares in one go will be hit with one 7% commission fee, whereas buying 500 shares in two separate transactions means that you’ll be charged 7% twice. 

Some traders have maintenance costs which means traders need to pay a certain amount of money on a yearly or monthly basis if they want to keep their account open. 

Some brokers have services in which financial advisors can make decisions on behalf of the broker, but this service will also come with additional fees. Furthermore, it’s not a necessary service if you understand trade well, or want to teach yourself through trial and error. 

How to make the most of your Brokerage Account

Beginners can paper trade while they’re learning the ropes. This means that they do not need to invest real money as paper trading, also known as virtual stock trading, is a simulation of the stock market. New traders can practice on the mimic of the stock market until they feel comfortable investing real money. New traders can also look into StocksToTrade who provide all the information a budding trader needs to get started. Robinhood is a free brokerage firm but free brokers have more restrictions on what traders can do and how much they can invest than brokers who charge. 

Customer service is important to traders due to how fast the stock market moves. If the company isn’t responsive when you need a question answered or are experiencing technical difficulties, then you could lose out big time on the stock market. 

The ideal broker has good customer service, assets, and satisfied customers who will vouch for the broker. Joining new-firms is a risk if the only reason for doing so is that they are new or cheaper; find a broker who can provide you with what you need, assist at crucial moments, and charge fees you find acceptable. 

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Last modified: October 17, 2019