How to Start an Online Broker Account for Investing

This is the second of a multi-part series on how to invest online 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.

invest online

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 ETFs (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 and invest online. There is one exception: HSAs. I created a list of the best HSA accounts, and Fidelity was the only broker with an HSA account option.

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 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 my picks for the best investment accounts:

Vanguard:

I have a number of broker accounts with Vanguard. What I really like about them is they have an extensive list of very inexpensive (low-fee) index funds, mutual funds, and ETFs under their brand and they don’t charge you for trading in and out of them (though there are a few exceptions on mutual funds).

  • Stock & ETF Trade Pricing: $0
  • Mutual & Index Fund Pricing: $0 to purchase Vanguard branded, other company fund pricing varies
  • Minimum Opening Deposit: $0
  • Annual & Inactivity Fees: Vanguard charges a $20 account fee on IRA’s and other accounts if you have less than $10,000 in Vanguard ETFs and mutual funds. If you have more or elect to receive electronic statements, there are no fees. There are no inactivity fees.

Fidelity:

Fidelity is just behind Vanguard in terms of the depth and breadth of low-cost investment options. In some regards, they beat Vanguard, with lower fees in some cases and even zero-cost index funds. As noted earlier, Fidelity is the only broker on this list with an HSA.

  • Stock & ETF Trade Pricing: $0
  • Mutual Fund Pricing: $0 to purchase Fidelity branded, other company fund pricing varies
  • Minimum Opening Deposit: $0
  • Annual & Inactivity Fees: $0

Schwab:

Much like Vanguard and Fidelity, Schwab carries a number of low cost branded ETFs that they don’t charge you to trade in and out of. They do have less, however.

  • Stock & ETF Trade Pricing: $0
  • Mutual Fund Pricing: $0 to purchase Schwab OneSource, other company fund pricing varies
  • Minimum Opening Deposit: $0
  • Annual & Inactivity Fees: $0

Ally Invest:

Ally Invest also has free stock and ETF pricing. Ally does not have its own branded funds like Schwab, Fidelity, & Vanguard, however – so it might not be as good of an option for those who investing in non-ETF funds. Check out my Ally Invest review for a full run-down.

  • Stock & ETF Trade Pricing: $0
  • Mutual Fund Pricing: $0 for no load funds, $9.95 to purchase/sell load funds
  • Minimum Opening Deposit: $0
  • Annual & Inactivity Fees: $0

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 ETFs don’t have these requirements.

Once you have that sorted out, the steps to start an online investing account are generally as follows:

  1. Create a login and password.
  2. 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.
  3. You’ll then have to fill out a ton of personal information about yourself including marital and income status, your Social Security number, 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.
  4. 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.
  5. 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!

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