Looking for a way to invest money for retirement, college or a shorter term goal like buying a house or starting a business? Assuming you're already contributing at least what your company matches in its retirement plan (if there's one available) and that you have an adequate emergency fund, you may want to open a brokerage account. It offers an option besides a 401(k) to invest in the market.
Through a brokerage account, you can buy and sell stocks, bonds, mutual funds, exchange-traded funds and other types of investments -- in some cases without having to pay taxes on the growth. Although you open a brokerage account through a broker, you can make the investing decisions yourself. Depending on the broker and type of account you choose, the commission (or fee) you pay can be as low as $5-$10 per trade. Here’s what you should know before you open an account.
There are basically two different types of brokers: traditional and discount. Traditional brokers -- like Morgan Stanley, Merrill Lynch and Wells Fargo Advisors -- specialize in providing personalized investment advice and typically offer a wide range of financial services for a premium.
Discount brokers -- like Fidelity, Schwab and ETrade -- specialize in offering DIY, low-cost investing services and education. Most discount brokers have representatives available for occasional questions, and some have professional account management available for an additional fee, but the point is to save money by making your own investment decisions. Lately, more traditional brokers are offering self-directed platforms as well to stay competitive.
What You Need to Get Started
When you open a new account, you will need to invest a minimum amount of money -- typically more for a taxable account and less for an IRA or 529 college savings account -- but the amount varies depending on the broker. Traditional brokers generally require a higher minimum than discount brokers who sometimes even waive their minimum requirement if you set up automatic contributions. TD Ameritrade is one discount broker that does not currently have a minimum deposit requirement. Traditional brokers typically charge an annual account fee (but waive it in certain situations), while discount brokers typically do not. With any broker, keep an eye out for other fees that may be hidden in fine print.
The process of opening an account is generally easy and quick. Traditional brokers typically require that you open an account through an advisor who can build a relationship with you and provide you with (and get paid for) additional services as needed. Opening an account through a discount broker can usually be done online, or you can print out the application and mail it along with a check for the initial deposit.
Keep reading for more on taxes and investing options.