How to Start an Online Broker Account
This is the second of a multi-part series on how to invest outside of a 401K. The whole idea for this series started when I was asking a group of about 30 co-workers if they invested outside of a 401K, and ZERO of them did.
I later asked readers why they had not got started investing outside of a 401k. The first part in the series dealt with the question of whether you should pay off debt or invest. This part will deal with how to actually start a discount online brokerage account.
When I polled readers, 18% said that the reason they have not invested is they didn’t know how to start an online broker account. Hopefully this post will do an adequate job in removing that barrier.
What is a Discount Online Broker?
A discount broker differs from a full-service broker in that YOU make the decision on what to invest in and actually execute the trade on your own. That may sound scary at first, but it’s really not so bad.
There are plenty of discount online brokers out there that have helped drive the cost of trading for amateur investors down significantly over the years. A discount online broker is really all you need. Full-service brokers charge exorbitant fees and don’t necessarily have your best interests in mind.
What Can you do Through an Online Broker?
There is a pretty long list of things that you can do through a discount broker, including:
- Putting your money into a money market account. If you leave your cash sitting, most will offer a nominal savings rate, much like a bank.
- Investing in a CD.
- Buying and selling stocks.
- Buying and selling stock options.
- Buying and selling index funds and other mutual funds.
- Buying and selling bonds.
And it’s relatively cheap to do all of them. Stock trades at most discount brokers are $7 or less and many offer no-transaction fee mutual funds, index funds, and ETF’s (more on what each of these is down the road…).
To put it simply: an online broker is a one-stop shop for you to invest your money in just about anything.
The Best Online Brokers: A Comparison
To get started, you need to pick a broker. There are a lot of good ones out there. Most offer relatively cheap trades. Some charge annual fees. Others have high minimum opening contributions. Some have better customer service and trading tools than others. Depending on your situation, the best discount broker for you might vary.
I generally look for accounts that don’t charge BS maintenance or inactivity fees or annual fees. I also look for low costs to trade stocks and funds and an easy to use interface. Here are a few of my favorites (none of these have inactivity or maintenance fees, and only 2 have annual fees):
TradeKing:
I have both my Roth IRA and Traditional IRA with TradeKing. TradeKing does not charge fees on their IRA’s and stock trades are only $4.95 each. Check out my TradeKing review for a full run-down.
- Stocks: $4.95/trade
- Mutual Funds: $14.95/open
- Minimum Opening Deposit: $0
- Annual & Inactivity Fees: $0 for IRA’s, $0 for non-retirement accounts, $0 inactivity fee
- Promotion: Reimbursement of up to $150 in transfer fees.
Scottrade:
I have had investment accounts with Scottrade. They have always maintained a flat $7 trading fee while others have shifted their fees around to gain new customers. One nice thing about Scottrade is that they have over 500 local branches that you can visit.
- Stocks: $7/trade
- Mutual Funds: $17/open
- Minimum Opening Deposit: $500
- Annual & Inactivity Fees: $0 for IRA’s, $0 for non-retirement accounts, $0 inactivity fee
OptionsHouse:
OptionsHouse has the lowest prices of the group at $3.95 for stocks and $9.95 for mutual funds. Don’t let the ‘options’ in the name scare you. You can do all of the standard stock and mutual fund investing with Optionshouse that you can elsewhere. They aim to make a platform that is friendly to options traders.
- Stocks: $3.95/trade
- Mutual Funds: $9.95/open
- Minimum Opening Deposit: $1,000
- Annual & Inactivity Fees: $0 for IRA’s, $0 for non-retirement accounts, $0 inactivity fee
- Promotion at the moment: Open a new IRA and get 100 free trades and up to $125 in transfer fees. Use promo code IRA FREE. Or you can open a non-retirement account and get a free Dell computer monitor.
Vanguard:
My 401K is housed with Vanguard. What I really like about them is they have an extensive list of very cheap index funds and ETF’s under their brand and they don’t charge you for trading in and out of them. If you want to invest in their index funds and ETF’s and have a large enough balance to avoid the $20 annual fee, then Vanguard is a great choice.
- Stocks: $7/trade, branded ETF’s & index funds are free
- Mutual Funds: $35 (if you go with Vanguard, just invest in their funds for free as they have the best index funds and ETF’s out there)
- Minimum Opening Deposit: $0
- Annual & Inactivity Fees: Vanguard charges a $20 account fee on IRA’s and other accounts if you have less than $50,000 in assets. If you have more, there are no fees. There are also $0 inactivity fees.
Schwab:
Much like Vanguard, Schwab carries a number of low cost branded ETF’s that they don’t charge you to trade in and out of. Their trading prices are otherwise the highest of the group, at $8.95 each and $49.95 to buy AND sell mutual funds that are not their brand. Don’t go with Schwab unless you intend in investing in their funds.
- Stocks: $8.95/trade
- Mutual Funds: $49.95/open & sell (excluding Schwab funds, which are free)
- Minimum Opening Deposit: $1,000
- Annual & Inactivity Fees: $0 for IRA’s, $0 for non-retirement accounts, $0 inactivity fee
How to Start an Online Broker Account
Now that you’ve picked out a broker, you’re probably wondering what steps you need to take to actually open an account. Check out the minimum opening deposits required, which I listed in the previous section. Note that buying into a mutual fund is usually more prohibitive than actually opening your broker account. Many mutual funds require you to have an opening investment of $1,000 to $2,500. Stocks and ETF’s don’t have these requirements.
Once you have that sorted out, the steps are generally as follows:
- Create a login and password.
- Choose the type of account you want. For most of you, it will be an individual investment account (non-retirement), a traditional IRA, or a Roth IRA. You’ll then be asked whether this is a cash or margin account. Since trading on margin is risky, you’ll want to select ‘cash’ 99.99% of the time.
- You’ll then have to fill out a ton of personal information about yourself including marital and income status, your social security, previous investing history, etc. This information is required by federal law when you start a new broker account, so everyone has to do it, despite how invasive it may seem.
- You’ll have to fund your account. Most online brokers allow you to do this in a few different ways: via ACH withdrawal from a bank account (usually free to do), via a wire transfer (your bank usually charges for this), via a transfer from another broker, or via check. Note that most, if not all, brokers accept cash or other form of payment.
- After you fund your account, there is usually a clearing period of up to a week for a background check and for the funds to clear.
- That’s it. As soon as your funds are cleared, you’re ready to invest!
Estimated time to complete the application and open an online broker account is usually under 15 minutes. It’s relatively straight forward. The hard part is waiting to invest your funds until they have cleared.
Now What?
You’re probably wondering what to do now. I will go through investing basics in upcoming posts, but I can only take you so far and can’t give specific investment recommendations. Start becoming obsessed with learning how to invest. In the meantime, move your funds to a money market account that will earn you a little bit of interest while you figure out what to invest in.
One step at a time. Open your online broker account first!
I am G.E. Miller, & 
G.E. — I’m curious why you have both a Roth and a Traditional IRA? I was under the impression that you *could* have both, but since combined contributions are what counts (ie. you can’t contribute to both in the same year), then there was little point in having both. Can you explain?
Maybe you’ve covered this before, and if so, can you point me towards the article?
Thx again, and keep up the awesome articles for the beginners — our country needs you!
-Holden
You can contribute to both in the same year. The IRA maximum contribution amount ($5K) is for both a Roth and Traditional combined. Having both offers a balance of tax benefits now and later.
This is very informative.
I have a quick question given your experience with various online brokers. I am considering a Scottrade account because my understanding is that ACH transfers can be used to trade after just 1 business day. Whereas Fidelity requires a 4-5 day holding period before the money can be used for trades. Do you know which of the above brokers also allow trades on ACH transfers after just a day?
I don’t have an answer to that. I have not seen any guarantee 1 day transfers in writing. Maybe others can weigh in with their experiences?
I asked a TradeKing representative who said it takes 3 business days to clear for trading.
An online forum stated that OptionsHouse takes a few days to clear as well.
I think that’s pretty standard. Thanks for letting everyone know.
Just heard back from customer service at OptionsHouse and they state ACHs take 3-4 business days to be available for trading. I guess this means that Scottrade is somewhat of an outlier for having a 1 business day policy.
From what I’ve seen, Vanguard waives the $20 fee if you elect to receive e-statements on the account, regardless of your balance.
It takes about 5 business days for the funds to clear in the money market fund when I do an ACH transfer from my bank account. You can’t trade until the funds clear in your money market fund.
Good tip, Tara. I did not realize that. I know if your balance is over $50k they wave it for sure. Who needs paper statements?!
I would encourage people to use a very low cost broker. Optionshouse is great for low cost trades. I personally use Firstrade and their $7 trade is on the lower end, not to mention their lack of added mutual fund fees, and they have recently updated their trading platform to be VERY user friendly. I find that you tend to overpay with companies like Fidelity, and Scottrade.
Sharebuilder is really excellent for beginners trying to build up a portfolio. You can pay just $4 and invest a small amount of money across an entire portfolio of stock for just one trade price, Ive recommended this to many of my friends.
I’m looking to start an IRA on one of these myself. I have a what is probably a stupid question but can’t find an answer. Is the cash account part of your IRA? The reason I ask is if I am wanting to contribute say 50 bucks a month or something like that can I build up my cash account and then execute a trade once I have enough funds to purchase? Any help would be appreciated.
Any funds that you don’t invest in something else are left in a cash account.
G.E., I noticed you didn’t rate ETrade, which is obviously one of the big guys out there. Any thoughts on them?
Their trades cost too much ($9.99), mutual funds are $19.99, they don’t have many good branded options like Vanguard or Schwab, and they charged me a custodial fee of $25: http://20somethingfinance.com/my-battle-with-etrade-over-a-25-fee-on-a-no-fee-ira/
I get that but are these funds considered to be part of your ira? Is the cash account like a money market? If the funds in the cash account are transfered out is that considered a withdrawal from your ira? Thanks for the help.
Yes, the funds are part of your IRA. At Vanguard, “cash” really means holdings in a money market fund. When you open a brokerage account, you open a connected settlement account which is a money market fund. It’s like transferring money between funds in your 401(k).
If you transfer funds from the cash account to another money market or use it to buy shares, it’s not considered a withdrawal from your IRA. If you transfer the funds to a bank account, however, it is.
So yes, you can let funds accumulate in the cash account until you have enough to buy something.
Does that makes sense?
That is exactly what I was looking for. Thanks for your help.
Is it the right time to invest in the Stock Markets considering the fact that Crude has again started moving northwards and has touched 32 Month high ?
Thanks for sharing its informative. Its all about taking risk which many people don’t take.
It’s worth thinking about what sort of investments you might want to make, now or in the future. Brokers differ widely in the range of investment products they handle. Most everyone does stocks, bonds, ETFs, and mutual funds. But what about options, commodities, currencies, etc.? You might think these are beyond you, but they’re often necessary to stay safely invested today. Many low-risk investment strategies use such seemingly exotic securities.
Brokers also differ in what they charge for different sorts of security. Low prices on stock don’t mean low prices on funds or options, etc.
Global trading is also important. The economy is rapidly globalizing, and the ability to trade foreign securities becomes more necessary every day. Ask which exchanges a broker covers, both in the US and abroad.
I’ve used Interactive Brokers with pleasure. They have low prices on a broad range of domestic and foreign securities.
Thanks again for a great article about on-line brokers.
I currently have Scottrade but want to switch to an online broker that allows ACH transfer out of the account. Scottrade currently only allows transfers in and it’s a different process to get your money out.
any suggestions?
Great question. Look forward to answer.
Hey on the reviews of brokerage accounts they all say something along the lines of $5.00/trade. Does that mean you have to fork over five bux every time you want to buy or sell stock?
Yes. Which is why it’s better to buy/sell less frequently.
I am looking to start trading but don’t know how or where to start this forum has been very helpful I am looking to build up investment and would like to know who is the best company to start with.