How to Open a Brokerage Account

A brokerage account is your gateway to investing outside of a workplace retirement plan. It lets you buy and sell investments like stocks, bonds, mutual funds and exchange-traded funds. Opening one is usually quick and can often be done entirely online in a matter of minutes. Here’s what to know before you start.

Types of brokerage accounts

Brokers offer several types of accounts, each with different tax treatment and rules.

A taxable brokerage account, sometimes called an individual or standard brokerage account, offers maximum flexibility. There are no contribution limits and no restrictions on when you can withdraw money. However, you may owe taxes on dividends and interest each year and on capital gains when you sell investments for a profit. Taxable accounts are useful for goals that aren’t retirement-related or for investing beyond retirement account limits.

Retirement accounts offered by brokers include traditional IRAs and Roth IRAs. These come with tax benefits, such as tax-deferred or tax-free growth, along with rules about contributions and withdrawals. Annual contribution limits apply, and withdrawing money before retirement age may trigger taxes and penalties, with some exceptions. Self-employed people may also open SEP IRAs or solo 401(k)s.

Joint accounts allow two people, often spouses, to own an account together. Custodial accounts let adults invest on behalf of minors.

Choosing a broker

Many brokers compete for customers, and the right choice depends on your needs. Consider several factors.

Fees matter a great deal. Many brokers now offer commission-free trades on stocks and ETFs, but check for other costs, such as account maintenance fees, fees for certain mutual funds, transfer fees and fees for broker-assisted trades. Also pay attention to the expense ratios of the funds you choose, which are charged by the funds themselves.

Investment choices should match your plans. Make sure the broker offers the types of investments you want, such as low-cost index funds, ETFs, individual stocks or bonds. Some brokers offer their own families of low-cost funds.

Account minimums vary. Many brokers have no minimum to open an account, though some funds may require minimum initial investments.

Tools and education can be especially helpful for beginners. Many brokers offer research, planning tools, educational articles and calculators.

Customer service is important if you’ll need help. Consider how easy it is to reach support by phone, chat or in person, and test it before committing if you can.

Features like fractional shares, which let you buy a portion of a share with a small amount of money, automatic investing and mobile apps may also matter to you.

What you’ll need to open an account

Brokers are required to verify your identity and collect certain information. You’ll typically need your Social Security number or taxpayer identification number, a driver’s license or other government-issued ID, your contact information and date of birth, employment information, such as your employer’s name, and information about your income, net worth and investment experience, which brokers use to understand your financial situation.

You’ll also need a bank account to fund your brokerage account, along with your bank’s routing number and your account number.

Steps to open an account

First, choose a broker and account type based on your goals. If you’re investing for retirement, an IRA may make sense. For other goals or more flexibility, a taxable account may be better.

Next, fill out the online application, providing the required personal and financial information. The process often takes 10 to 15 minutes.

Then link your bank account and transfer money. Transfers may take a few business days to settle. Some brokers also let you transfer existing investments from another brokerage account.

Choose your investments. For many beginners, a broad, low-cost index fund that tracks the overall stock market, or a target-date fund, offers simple diversification. Avoid putting all your money into a single stock.

Consider setting up automatic monthly investments. Investing a fixed amount on a regular schedule builds the habit of investing and removes the temptation to time the market.

Know your protections

The Securities Investor Protection Corporation, or SIPC, protects customers if a member brokerage firm fails, up to certain limits, including a limit for cash. SIPC protection helps return customers’ securities and cash if a firm goes out of business. However, SIPC doesn’t protect against losses from falling investment values, which are a normal part of investing.

You can check a broker’s background, registration and any disciplinary history using FINRA BrokerCheck, a free tool from the Financial Industry Regulatory Authority. The SEC’s Investor.gov website also offers free educational resources for investors.

Protect your account

Use a strong, unique password and enable two-factor authentication. Be cautious of phishing emails and calls pretending to be from your broker, and never share your login information.

This article is for education only and isn’t investment advice.