What Is a Brokerage Account?
What Is a Brokerage Account?
If you are working and have an employee pension plan, you have a brokerage account. Your investments are held at a brokerage firm. The brokerage firm is acting as the custodian for your investments, but you are responsible for making the investment choices.
For anyone to buy and sell securities you must go through a brokerage firm. If you have savings outside of a pension account that you would like to invest, opening a brokerage account is a first step.
This year I opened joint brokerage accounts with both of my nieces. They will be thrilled to be mentioned here!
My nieces are 20 and 25. I thought, if there is one thing I can teach them, it is how to start investing. I opened a joint account with each of them at Schwab. This is not a solicitation for Schwab. Schwab happens to be the trading and investment platform I use however there are many choices for a brokerage firm in today’s market.
I never thought much about opening a brokerage account because I was a broker at a brokerage firm. But in talking to some of you who are just getting started I realized the process of opening an account can be a little intimidating.
The new account forms I needed were easy to find on the website and I could complete most of the information online. I funded each account with $1,000.00.
For those of you who have never opened an account at a brokerage firm I can tell you from experience:
- It has never been easier to open an account. You still have to provide the same information, but technology has really streamlined the process.
- $1,000.00 is enough to get started. Some firms will open an account with $500.00.
I recommend going to the following site. There is a complete list of the personal information you will need to provide when you open a brokerage account. Be sure to read the application thoroughly and ask questions if anything is not clear.
https://www.finra.org/investors/highlights/opening-brokerage-account-part-1
What is a brokerage firm and what do they do?
Brokerage firms are regulated companies that buy and sell securities. Regardless of whether you are using an online brokerage firm, using an advisor, or buying and selling on your own, all “orders” are placed through a brokerage firm.
A brokerage firm is a non-governmental company that is licensed and regulated to buy and sell securities. Brokerage firms are regulated by the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC).
FINRA is a not-for-profit organization authorized by Congress to protect America’s investors by making sure the broker-dealer industry operates fairly and honestly.
Today there are 3,726 broker dealer firms under FINRA’s supervision.
The largest Broker Dealers in the US by Assets Under Management are:
- Fidelity
- Charles Schwab
- TD Ameritrade
- Edward Jones
- Raymond James
You can find a thorough review of each of these firms in addition to information on firms not included in the list above:
I found this website to be very helpful. There is detail for each brokerage firm on the services provided, the cost of transactions, minimum amounts required to open an account and the access to hundreds (or thousands) of different mutual funds, ETF’s, individual stocks, and bonds.
I am going to use Schwab again as an example of how a brokerage firms work. Schwab does not make investment decisions on my behalf, unless I give them discretion. This is important to know when you open your account. It is a question you will be asked.
Remember to say no.
You do NOT want to give discretion to a brokerage firm to make decisions on your behalf.
The brokerage firm is there to provide administrative duties required to manage your account. The administrative duties are things like providing a statement, providing year end tax reporting, keeping track of your investments, pricing your investments and tracking gains and losses.
The top brokerage firms also provide a wealth of educational materials and research. This is an important factor to consider. I find the amount of information to be more than enough to help me decide when choosing different securities to invest in.
The trading “platform” is simple. It should be. Everyone who is new to investing is worried that they will make a mistake. When you enter an order, you will receive multiple “please review your order” messages before you enter a trade.
This isn’t like buying tickets online. You do not have to state that you are not a robot. You do not have to select all the pictures with a stop sign. You are not given 6 minutes to complete three pages of personal information while toggling back and forth between minuscule seating charts.
In fact, if you are a master of buying tickets on line you will excel at placing trades.
You can take your time, and nothing will “blow up.” You can decide to do nothing, one of my preferred methods if I get to the point where I think I will wait or do a little more research.
Every time I place a trade to buy or sell I feel a little thrill like, “wow, I took a step towards making some money.”
I like it.
This website is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security, nor does it constitute an offer to provide investment advisory or other services by The Modest Economist LLC.
