If you’re interested in investing in the stock market you might have come across the term “brokerage account” and asked yourself what it is, and why do you need it.
Even the most experienced traders are technically not qualified to make trades on the stock market themselves, but brokers are. Stock brokers can be thought of as the real-estate agent of the stock market as they know how to execute trades, the rules and regulations, and the rules and regulations set by the Securities and Exchange Commission (SEC), which maintains a fair and efficient stock market. A lot of stock brokers work as part of a bigger brokerage house or agency, while others operate on behalf of individuals or Wall Street.
What traders need to do is: set up an account, deposit their funds and start trading.
What is a brokerage account? It is similar to a bank account as it’s a safe place for traders to store the money they intend on investing, and the profits they made back from shares. Like a bank account, an account number is issued to the trader. Although they’re not run by bankers, some brokers function like banks as traders can write cheques and use linked debit cards with them.
A brokerage account is a mandatory requirement to be allowed to trade on the stock market.
There are a few different types of brokerage account. A trading account is one where the trader is in full control. This suits experienced traders who want to manually trade based on their research and experience of the market. A full-service brokerage account can trade for brokers and provide advice. There are different types of accounts in between these two examples, if a trader wants autonomy, but also the ability to contact the broker and ask them to act on their behalf, that can be accomodated.
How to Set it Up:
Setting up a brokerage account is a simple process, once a broker has been selected. Popular brokers include, but are not limited to; E*Trade, Interactive Brokers, Fidelity, and TD Ameritrade. Robinhood is one of the free brokerage firms available, but a free broker comes with restrictions and restraints that those who require commision don’t have.
Setting up an account, for example one with E*Trade, requires filling out an application. First the broker will want to know basic personal information such as your name, date of birth, address, and contact details. Then they require more relevant information such as your net value, marital status, social security number, and whether or not you have any dependants. Once this stage of the application is complete, the broker will need to know your trading goals, stock market experience, and how the account will be financed.
It’s worth shopping around for a broker, and many offer benefits to traders to entice them to sign up, for example, one might offer free investment advice, or commission free-traders under a certain amount.
How to Use It:
Setting up the account itself is usually a free process, the trader then has to deposit the amount of money they’d like to trade with into the account.
Most brokers take approximately 7% commission per trade, but the exact rate differs across all brokers, 7% is the industry average. Purchasing 3000 shares at once will incur the 7% commission, but buying 1,500 shares in two separate transactions will add up to 14% commission as it is charged per purchase. Traders should try to buy as much as they can in one go if they want to reduce the amount of commission they end up paying. As well as commission, some brokers require traders to have deposited a certain amount of money before they’re allowed to trade. Not all brokers have set a minimum amount of money needed to trade, new traders can start off with a broker who don’t require this. Some brokers also need a certain amount of money to stay in the account at all times. This usually applies to whos who trade on the margin. These traders will have set up a margin account, and borrow money from the broker to purchase more shares they can normally afford. Margin trading is for experienced traders confident they can pay the loan back.
Budding traders should paper trade before investing real money. Paper trading, which is also referred to as virtual stock trading, is a replica of the stock market which mimics how it behaves. Paper trading is an opportunity to practice trading without running the risk of losing a real financial investment. StockstoTrade is also a valuable service for new traders as it has resources for them to learn about the market and how to engage with it.
Things to Consider:
There’s a lot to consider when it comes to selecting a broker.
Customer service should be taken into account due to how fast the stock market movies. If the customer service is slow, then traders could miss out and lose money if they have a question that needs to be answered or are having trouble with their account. This is why traders should read the reviews left by customers, and take the brokers reputation into account while deciding whether or not to open an account with them.
The amount of fees and commission that a broker requires has a large influence on who traders work with. Traders will be hesitant to set up an account with a broker who charges above the industry average commission fee, unless they have additional services that justify the charge. Some brokers charge additional fees for financial advice, but this is not something that traders must opt-into. Some brokers will also require a minimum amount of money to be deposited once the account has been set up, to allow traders to start using it, while others require above a certain amount of money to remain in the account at all times to keep it active.
Have a strong idea of how often you would like to trade, this is because some brokers require traders to make above a certain amount of traders per month.