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How To Open A Brokerage Account Online For The First Time

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There is no single best brokerage account. Each of the best online brokerage account for beginners (your connection to the investment markets) has different features intended for different types of investors that make it better for one type of trading, or trader, over another. Click Here To Go Straight To Our Online Tutorial

The key is finding the broker that works best for you and your investing goals. The best online brokerage account for beginners will provide access to major markets in an easy to use format, adequate trading tools for your strategy and access to professional support.

You will find step-by-step information on how to open a brokerage account online in this article. Along with that is information on the different types of brokerage accounts that are available, and which one might be right for you. Also included is information on how to open a brokerage account for a minor, and about Finance & Markets, the best stock trading site for small investors.

best brokerage account

This Is How To Choose The Best Brokerage Account For Beginners

With so many to choose from, it is hard to know which is the best trading account for you to use. A trading account is an account that allows investors direct access to the financial markets. A trading account typically means a brokerage account, and that begs the questions, what is the purpose of the brokerage account?

The basic brokerage account definition is an account set up with a licensed broker for buying and selling securities. Average investors, people like you and me, are not able to access financial markets directly and must use the broker and the brokerage account to make our investment transactions. Funds are deposited into the account and held in trust by the brokerage firm; the account holder can use the balances to buy and sell securities such as stocks, bonds, commodities, mutual funds, and derivatives.

There are many types of investments that can be accessed through a brokerage account, and more than one type of account that can be opened. The most common are regular brokerage accounts and IRA accounts although there are many others including juvenile accounts, joint accounts, and business/corporate accounts.

A regular brokerage account is not tax-sheltered and subject to capital gains and other taxes that may be incurred. The primary benefit of a regular brokerage account is that Investors can deposit and withdraw funds at will so long as their trading account requirements are met. IRA accounts, individual retirement accounts, are tax-sheltered and not subject to the same tax requirements as a regular brokerage account. The downside is that there are rules about when and how funds can be withdrawn, early withdrawals can face high tax burdens and penalties.best online brokerage account for beginners

This Is How To Open A Brokerage Account Online

Step One: Choose An Account Type

This is perhaps the most important step in choosing which brokerage account to open. The reason is simple; the type of account you choose can have a tremendous impact on the type, amount and timing of taxes that you pay. Additionally, some accounts and specifically tax-deferred IRA accounts, are usually not allowed to take on high-risk investments. This means that an IRA brokerage account may not be allowed to trade options, futures, currency and other alternative investments.

If you don’t want to trade riskier types of investments in your IRA that’s OK, it’s not a good idea to get aggressive with your retirement savings, but some people do. Options trading, in particular, is a great way to enhance returns within a portfolio and you can’t benefit from those strategies if you aren’t allowed to trade options. The good news is that there are brokerages that allow options trading in IRA accounts.

Before you make this decision, you need to talk to a tax professional. Regular investing accounts are subject to taxes that in some cases are complicated and onerous. Some forms of investment vehicle like REITs have tax-exempt status (the underlying investment company, not you the investor) that means tax liability is transferred to you when they pay dividends. The only way to avoid this hassle is to hold those types of investments in a tax-deferred IRA. For best results, it may be a wise choice to hold some of your investment capital in an IRA account and some in a regular account to trade the widest array of investment types with the least exposure to taxes.

Step Two: Choose An Online Brokerage

The next step is to choose an online brokerage at which to set up your account. Knowing what kind of account you want to open before you reach this step is a big help for your brokerage account comparison. It will save you valuable time by weeding out brokerages that don’t fit your needs.

The biggest distinction between brokerages is this; some financial institutions (banks, insurance agencies, financial management companies) will provide brokerage service to existing clients while others are in business solely for trading and investing.

The first type is an easy choice because you can combine banking, saving and investing in one place with the caveat trading services are likely to be limited. The second type, brokerages in businesses exclusively for trading, is the better choice for active investors because they will have a more comprehensive trading platform.

Things to consider when choosing a broker include fees, commissions, how often you want to trade, available support and the minimum deposit. All accounts come with fees that may include but are not limited to annual fees, inactivity fees and extra charges for derivative trades or research.

Commissions for trades are a concern because they can cut into your available assets. Most brokers charge commission in the range of $5 to $15 per trade for stocks, bonds, ETFs and mutual funds. Some brokers will offer free ETF and mutual fund trades which is a big bonus for those traders. The number of trades you plan to make it each can affect how commissions impact your bottom line. If you don’t plan to trade very much the size of the commission won’t matter.

Trading tools are a big concern. While some brokers are set up for traders and come with full-featured, live trading charts with no time delays others are not. At the same time, if you are looking to trade options, a brokerage with options capabilities and trading tools is a must.

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Step Three: Sign Up For The Best Brokerage Account

This is the easy part. Once you’ve chosen the account, you want to open, and a brokerage at which to open it, you sign up. For this article, I will focus on how to open a brokerage account with Fidelity, but the basics are the same for all brokerages.

The first thing to do is go to their website and click on the link “Open An Account.” At this point you will be prompted to choose which type of account to open, the five most common choices are; Rollover IRA (for when you move an IRA from one account to another), Roth IRA (better withdrawal conditions), traditional IRA, brokerage account and a brokerage account with cash management.

In this case, we would recommend an account such as the brokerage account with cash management because Fidelity is leading financial institution with a wide array of banking services. The cash management portion is a banking account with checking and ATM services that can be accessed worldwide.

The next choice the brokerage will ask for is will you be opening an individual or joint account. This decision is best made with your spouse (if you have one) and possibly the advice of your tax professional. If there is no spouse go ahead and move to the next step; filling out the questionnaire and account holder information. You will need to have pertinent information such as social security numbers and birth dates so be prepared if you are opening this account for, or in trust for, someone else.

Once the basics of the account are set up, you will be asked to set preferences. These include email settings and services associated with the cash management account such as ATM cards, checks and bill pay. When you confirm your information, you’ll have to accept the terms and conditions, and once that’s done, you are ready to go. Almost.

Step Four: Fund The Best Brokerage Account

The next step is to fund the account, and there are a few ways. The most common is to fund from a bank account, and this can be done on a one time or recurring basis (for saving and regular investing). The other two most common types of transfers are electronic transfers from one brokerage account to another and downloading the document and mailing in a paper request. Once the account is funded, you can begin to make your investments. If at any time you have trouble or questions there are always customer support representatives you can call.

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The Best Brokerage Account Types For Your Needs

There are many types of accounts, not just regular brokerage accounts and traditional IRA accounts, that you can choose from. They are tailored to meet the needs and finances of parents saving for their children, small businesses who want to offer investment to their employees, and the self-employed.

Roth IRA for Kids – This is an IRA account for a child with qualifying earned income and managed by an adult. Post-tax contributions can be made within annual limits and then withdrawn tax-free under certain circumstances including paying for higher education or buying a home.

Inherited IRA’s – Inheriting money or investments can be a two-edged sword. On the one hand, your loved one has left you an asset to enrich your life, but on the other created a tax-burden that can be avoided. In most cases, inherited investments can be held in an inherited IRA that allows the account to continue growing with the tax-deferred benefits of a traditional or Roth IRA. There are some differences, the main being minimum required distributions (money you have to take out and pay taxes on).

SEP IRA – SEP IRAs (Simplified Employee Pension plans) are designed for the self-employed and small business owners who have employees. The account is simple to set up, the same as opening a regular or IRA account and allows contributions to be deducted from taxes and grow tax-deferred. Contributions are very flexible and can be up to 25% of compensation.

Self Employed 401(K) – The self-employed 401(K) account is designed for the self-employed and small business owners when they are the only employee. This account qualifies for tax-deductible contributions and tax-deferred growth. Setting them up is a simple as opening a regular IRA with the benefit of higher annual contribution limits, up to $18,500 in 2018.

SIMPLE IRA – The SIMPLE IRA is an IRA plan for businesses with fewer than 100 employees. It allows for tax-deductible and tax-deferred growth with the addition of employer cash match up to 3%.

529 Account – The 529 Account is a flexible saving account for education costs that grow tax-deferred. Qualified withdrawals are federal income tax-free. Funds can be used for a wide array of education expenses including costs for K-12 as well higher education, tuition, boarding, fees and more. When choosing this plan, it is best to consider your states plan too as it may provide additional benefits. US residents of any state who are 18 or older may invest in such a plan provided they have the tax ID or SSN of the beneficiary (can be the same person).

Custodial Accounts – These accounts are based on the Uniform Gifts/Transfer to Minors Act and allow funds to held and invested on behalf of minors. Funds in a custodial account are irrevocable gifts so be aware when choosing this type. These accounts are typically the same as a regular account, simply held in the name of a minor, and may be traded without restrictions.

Trust Account – You can open and establish brokerage accounts in the name of established trusts.

Estate Account – You can open and manage brokerage accounts for established estates.

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The Best Brokerage Accounts: Trading Levels

Brokerages that support and allow options trading will assign you a trading level. The trading level is based on your responses to questions about your level of options trading experience, and the balance in your trading account. These levels are intended to help protect investors from risk and making costly mistakes. The odd thing is that while all brokers will assign you a trading level, the criteria for those levels are not set in stone.

Trading Level 1 – Trading level 1 is the lowest level and will only allow you to write options contracts on stocks you already own. This is a very restrictive options trading environment but at least allows investors to sell covered calls, our preferred cash flow strategy for trading options.

Trading Level 2: –Trading level 2 would allow traders also to buy uncovered options positions, calls or puts, provided they had the cash in their accounts to cover the purchase. The good news is that this is trading level most commonly assigned to new options traders.

Trading Level 3 – Trading level 3 is the next level and one not hard to achieve. It allows traders to create debit spreads. This means a trader could sell an uncovered option position (the trader doesn’t own the corresponding stock) provided it was matched by an offsetting long option position on the same underlying stock. The risk in this is limited to the initial cost of the spread which would be the cost of long (bought) option minus the premium received for the short (sold) option. We recommend that you request this trading level regardless of your experience, it’s easier to start at level 3 than to upgrade to it.

Trading Level 4 – Trading level 4 is for experienced options traders. It allows the creation of credit spreads, a position in which profits are created up front and losses are incurred only if the underlying position doesn’t perform as expected. In most cased trading level 4 will require a margin account, an account with high minimum balance requirements and the possibility of incurring losses greater than the account balance (this would create a margin call).

Trading Level 5 – Trading level 5 is for the most experienced options traders. It requires a margin-enabled account and allows traders to open any kind of position they want. This may mean naked shorts, selling options that are not covered by an underlying position (stock or option), but usually means complex strategies like iron condors, butterflies and other strategies that seek to profit regardless of market movement.

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This Is How To Find The Best Online Brokerage Account For Beginners

This, what you are doing right now, researching and educating yourself, is how you find the best online brokerage account for you. Brokerage account reviews are a place to start, but they don’t give much depth. With our help, you now have the information you need to make an informed decision that best meets your needs. With that out of the way, you can begin your career as a self-directed investor and one who capitalizes on the information we provide here at Finance & Markets. Many of our bulletins, newsletters, and research are free, all you have to do is sign up. Don’t wait for the market to run you over, sign for Finance & Markets now before it’s too late.