In principle, opening an online brokerage account is as simple as opening a bank account; you sign up and fund the account. However, there is one big difference: A brokerage account lets you start placing trades and investing your money. When opening a brokerage account, all investors should ask themselves, “What are the risks, and how do I overcome them?”
Creating an online brokerage account at one of several available online brokers can be done in a matter of minutes, but you should take some time to study which broker can be of the most help to you. Any new investor needs to learn how to mitigate the risk of losing money in the markets before beginning to take risks with their hard-earned money.
Steps Required to Open an Online Brokerage Account
Investors need to determine if they want to open a brokerage account beyond the work of saving for retirement through an IRA, 401(k), or some other tax-advantaged account. Everyone should save for retirement, but those who have the ability to enhance their earnings may want to open a brokerage account simply for the purpose of generating capital gains on their investments.
The first step if you want to invest additional money will be to determine whether you want to open a margin account (which allows you to instantaneously borrow money to invest with) or a cash account, which only allows you to invest the money you have. Once you have answered that question, your remaining steps include the following:
- Evaluate how a brokerage can help you manage risk
- Choose a brokerage
- Apply for an account
- Fund the account once accepted
- Practice at length before buying any stocks
Step 1: Decide How You Will Use Your Brokerage Account
The key decision is whether you will implement your investing decisions with a margin account or a cash account. Using a margin account allows you to buy a larger number of shares in a stock than you can in a cash account. That’s because the margin account lets you automatically borrow money for your investment purchases.
The benefit of using a margin account is that you get to keep the profits from your additional shares if the stock goes up in price. The risk is that you’ll have to take losses if the stock goes down in price.
For example, suppose that in your margin account you buy all possible shares of stock XYZ. You will have purchased double the amount of shares that you might be able to buy in a cash account, so that the impact on your account balance will be twice as potent as normal. If the price of XYZ drops by 10%, the value of your trading account will decrease by 20%.
Of course, the reverse is true and a 10% increase in the value of XYZ shares would create a 20% gain. For investors who don’t want the added volatility of results in their trading account, using a cash account is best.
Step 2: Evaluate How the Brokerage Can Help You Reduce Risk
There are dozens of brokerages through which you can open an online account allowing you to buy and sell U.S. stocks and other securities. The most popular ones have been given a detailed review by the Investopedia staff, because each brokerage has a different way of delivering its services.
Some are tailored for simplicity and ease of use, while others are designed to help investors do a wide variety of research and analysis. Investors need to be able to research companies and perform due diligence, decide on an asset allocation and selection strategy, and execute orders without error.
Brokers can vary widely in the amount of research tools, such as charts, indicators and databases of news reports, that they provide. Some brokers also offer critical educational resources to help investors better understand the tools they can use. In general, the more trades you make each year, the more the quantity and quality of research tools becomes important to you.
Regardless of the power and breadth of tools available to you, the platform needs to be easy enough for you to use so that you don’t place accidental orders. Here are additional considerations for account holders to consider.
- Brokerage account minimums: Many brokers allow you to open an account with $1,000 or less. Some even allow you to open the account without making any deposit at all (though the account might be closed after a few months if you don’t add funds). Other brokers may require $5,000 or more, but these usually offer a greater variety of services on their platforms.
- Account fees: The online brokerage industry has experienced such intense competition in the past few years that trading commissions on stocks have largely been eliminated. Other kinds of fees still remain, but overall it has become much less expensive to trade stocks through an online brokerage account.
- Account features: The most commonly required features for most investors include tools for selecting securities as well as the ability to track and analyze investment performance. Some investors may find it very important to be able to trade fractional shares, while others want to access robo-advisor services. Perhaps the most important category of features includes investor education and services aimed at beginner investors, which can vary greatly from one brokerage to the next.
- Investment options: All brokerages in the U.S. offer access to U.S. stocks and exchange traded funds (ETFs), but most have some degree of limitations to these. Many do not offer access to over-the-counter (OTC) stocks and each may differ on the access they give to mutual funds, bonds, global securities, options, futures, forex, and cryptocurrency trades. Investors should carefully review each brokerage they consider to be certain they can invest in their preferred securities.
Step 3: Choose the Best Online Brokerage Account
Once you have done a thorough review and comparison of the brokerages that have the features you want, you can select the one that best fits your needs, and appears to be easiest to use for what you want to do. Your choice may be heavily influenced by additional factors such as complementary investing platforms or international requirements. No matter how you decide, you should also carefully consider any transfer requirements that could be specific to your location or life circ*mstances.
Best Online Brokerage Accounts
| Company | Account Minimum | Fees and Commissions |
|---|---|---|
| Fidelity | $0 | $0 for stock/ETF trades, $0 plus $0.65/contract for options trade |
| Interactive Brokers | $0 | $0 commissions for equities/ETFs available on IBKR’s TWS Light, or low costs scaled by volume for active traders that want access to advanced functionality such as order routing.$0.65 per contract for options on TWS Light; that is also the base rate for TWS Pro users, with scaled rates based on volume. $0.85 per contract for futures. |
| tastytrade | $0 | $0 stock trades, $1 to open options trades (capped at $10 per leg), $0 to close |
Step 4: Start the Application Process
When you apply to open a brokerage account, you’ll provide basic identification, tax, and income information to the broker. The Securities and Exchange Commission (SEC) regulates the information brokers need to acquire from clients as part of its "know your client" (KYC) verification standards. For some of the newer brokerages, information gathering can be more streamlined and simplified, but even the most detailed information-gathering process won’t take too long. You may be required to provide tax numbers or a copy of your government-issued ID, but even the longest such procedure seems to be complete within 30 minutes.
Step 5: Fund Your Account
Your application will be screened or reviewed by a customer service agent, and usually approved within a couple of hours. It may take longer for any unusual circ*mstances such as high-traffic periods or banking holidays.
Once the application is approved, you will be given the opportunity to transfer funds from your bank accounts into your brokerage account. Here you will need the bank name, the routing number and the account number. If you don’t feel comfortable providing this information online, the brokerage will likely give you the option of sending funds via wire transfer, though there is a charge for that service.
Depending on which funding option you choose, your money may be available for access in the brokerage account ranging from 24 hours to one week later. However, just because you can access this money and put it to work immediately does not mean you should. It is prudent to practice your investing activities before trying to do so in live conditions.
Step 6: Simulate Your Trading Before Going Live
Investing may sound simple, but in reality it requires a lot of discipline. In its simplest form, you buy when prices are low and sell when prices are high. But it is never that straightforward. There are many nuances and traps you can run into along the way, and so much of the process is best learned by simple trial and error.
Thankfully you don’t have to let those errors cause you to lose money on your investments. You can learn the art of investing by using a simulation for virtual trading. Many brokers offer simulated trading accounts, but even if the broker you select does not have one available, Investopedia’s Simulator is an excellent resource for learning the basics of order entry, monitoring investments, rebalancing, and closing positions.
Requirements for Opening an Online Brokerage Account
Just remember that when it comes time to open an application for an online brokerage, there is some basic information you’ll want to have on hand. If you are not a citizen in the country where you are opening an account, additional documentation may be needed and more restrictions will apply.
Personal Information
- Legal name
- Current address
- Social Security number (or other tax ID number)
- Years of previous knowledge or experience in securities such as stocks, options, futures, or forex
- Citizenship information (if applicable)
- Military information (if applicable)
Banking Information
- Name(s) on the bank account
- Account type
- Bank name
- Routing number
- Account number
Note that information may vary for alternate transfer mechanisms.
The Bottom Line
Online brokerage accounts have become both more powerful and less expensive over the years, and great strides have been made in the way of onboarding procedures. Some accounts can be opened as quickly as 15 minutes or less, and funded within a day. Investors should take care to thoroughly research the kind of account features they need because getting the account open is just a small part of what you need to know to effectively invest online.
What Are the Three Types of Brokerage Accounts?
Three types of online brokerage accounts exist for customers to choose from:
- Cash accounts: No money is leveraged, there is often a three-day settlement period following each trade, and some asset types are limited.
- Margin accounts: Money can be leveraged at a ratio of 2:1 allowing investors to buy twice as many shares as they might normally be limited to. Interest is paid on any amount use over the account’s equity balance. Same-day settlement is allowed.
- Tax-advantaged accounts: These include individual retirement accounts (IRAs), 401(k) accounts, and other tax-advantaged accounts. Funds can be deposited, but may not be withdrawn without penalty until the investor reaches a designated age. As long as the money is in the account, it may grow tax free.
Do You Pay Taxes on Brokerage Accounts?
Cash account and margin account holders pay taxes on short-term or long-term capital gains based on how long they have held each position. Positions held one year or more pay taxes on the gains at the long-term capital gains rate. Retirement accounts do not pay taxes until money is withdrawn from them.
Can You Withdraw Money From a Brokerage Account?
Yes. You can withdraw money at any time. Fees may apply, and taxes will be levied if money is withdrawn from an individual retirement account (IRA).
What Are the Risks of an Online Brokerage?
Online brokerage accounts are easy to open and you can quickly put your money at risk of loss. You could lose some or all of your money if you don’t know how to calculate the risk of your trade.
