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Opening a brokerage account is one of the best ways to begin growing your money. This critical step will allow you to begin building wealth and the best part is, you can watch it grow from the comfort of your bed, or a beach (as long as there’s Wi-Fi). The goal of this post is for you to 1) understand what a brokerage account is, 2) learn about online brokers, and 3) how to open an account.
What is a Brokerage Account?
Simply put a brokerage account is a user interface connecting you with different financial markets allowing you to buy and sell equities; more commonly known as stocks, like Apple, Google, and Ford Motor Company. Buying and selling equities is only one of many investment options you can include in your investment portfolio. A brokerage account will enable you to buy options, bonds, mutual funds, commodities, and foreign exchange securities.
Over the years competition of the online brokerage business has grown so fierce, that today we can buy and sell securities at almost no cost to you. And some companies are completely free, like Robinhood. This is great news for investors like you, because not only can your commission fees only cost a few dollars, but many online brokerage firms provide you with vast amounts of research, education, and tools to allow you to be more efficient and effective as you learn how to trade. Below, I have created a chart of some of the largest players in the online brokerage business, and others like Robinhood, Stash, and Acorn which are geared towards those who have never invested before.
Fidelity, E-Trade, and TD Ameritrade all have fairly simple platforms and are recognized as some of the most popular online brokers today. This is largely due to their easy to use tools, great research, and education centers. The costs are small but this is only relative to how much you plan to invest. For example, if you plan to purchase $100 of XYZ Company, you will have to pay $4.95 in fees to Fidelity when you buy the stock and then another $4.95 when you sell the stock. Let’s say after one year XYZ Company increases 15% which translate to $115. Not bad, but in reality, you earned $105.10 or 5.10% minus capital gains taxes. As a general rule of thumb, I would recommend investing at least $1000 in each stock if you plan to use one of these three platforms.
There is a way around paying a commission on sites like Fidelity and other large online brokers. You can purchase exchange-traded funds (“ETFs”). An ETF is similar to a stock in regards to how they traded and how we buy and sell them, but ETFs are not companies like apple and google. An ETF is a basket of different assets or stocks that track a specific index or sector. For example, the ETF SPY is an index that follows the S&P 500. If the S&P 500 index increases 1%, then SPY will increase by approximately 1%. ETFs are offered on virtually all asset classes and indexes ranging from traditional investments to alternative assets like commodities or currencies. Fidelity, E-Trade, and TD Ameritrade all offer over 250 different ETFs on their platforms. The only fee you will pay is on the underlying ETF. Every ETF charges a small fee per year. For example, if I purchase $10,000 of SPY, I will pay 0.09% on the value of the asset, which translates to $9 dollars a year. The 0.09% fee goes towards the administration and maintenance fees.
Over the last few years, new players have emerged in the online brokerage business such as Stash, Acorn, and Robinhood. These companies have and continue to create innovative products for investors who only have a few dollars to invest at a time. The goal of Stash is making investing so simple, anyone at any age can participate. Stash has a cool investment feature where you invest based on your interests and personality. If you’re a Techie, stash has ETF’s that specifically invest in technology stocks. Or if you like eco-friendly companies, Stash has an ETF focused on companies that produce solar, wind, and other forms of renewable energy. Stash has investments for everyone and provides investors with an easy understanding of what they are investing in.
One of my favorite products which Stash and Acorn allow you to participate in is buying fractional shares. If you only have 20 dollars to invest and you want to buy Amazon, which is currently trading at around $1,800 a share, you can. You would never be able to purchase this on Fidelity, E-Trade, or TD Ameritrade since you only have $20. But you could buy $20 worth of Amazon on the Stash and Acorn platform. You would own 1.11% of one share and should amazon increase 10% after one trading session, you will earn 10% as well on your investment.
Another innovative product Acorn has introduced is something called “Round-Ups”. A Round-Up is the spare change captured from rounding up every transaction to the nearest dollar. All you need to do is link your credit and or debit card to your Acorn account. For example, l just purchased a cup of coffee for $3.50, Acorn will charge me another $0.50 and add it to my Acorn account. Once I build up $5, Acorn will automatically invest the $5 for me. This is one of my favorite features of Acorn because it’s an easy way to invest and grow your money without you even realizing it. The “Recurring Investments” feature is another great way to grow your wealth. Acorn automatically takes a specified amount from your checking or savings account each day, week or month and invests it for you. Fidelity, E-Trade, and TD Ameritrade also have this feature and I personally use it. “Round-Ups” and “Recurring Investments” are great ways to build wealth all while having a minimal impact on your life.
Okay so now that you know what a brokerage account is, and some of the cool features they have, let’s open one up.
Opening your Account
After you decide which brokerage platform fits your individual needs, it’s time to open one. I would recommend considering opening two accounts. Let say you open a fidelity account for your more serious, larger investments, and use the “Round-Ups” feature from Acorn, so you can easily save and invest every time you use your credit or debit card.
Before you open your account you will need the following items:
· Social Security Number or Individual Taxpayer Identification Number
· Foreign Tax ID, passport, or visa number (if you’re not a citizen or permanent resident of the U.S.)
· Employer’s name and address
Don't worry if you're in high school or college, as long as you are at least 18 years old you can open one. And if you're a hungry teenager like I was, your parents can set up a custodial account so you can trade as well. Once you have these documents, opening an account is very simple and each brokerage platform takes you through the process in under 10 minutes. So go ahead and give it a shot. Please let me know if you have any questions or comments, by writing below or to firstname.lastname@example.org and I’ll be happy to help you.