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Opening a Brokerage Account: Know What to Consider

Opening a Brokerage Account: Know What to Consider

Opening a brokerage account for the first time is exciting and daunting. There are many things to know before opening an account and things that are required when you open the account. Here is an all-in-one article for those who want to open a stock brokerage account for the first time.
Christie J.
Trading in the stock market is a profitable and risky affair. You need to know what to consider when opening your first brokerage account. It is always beneficial to have a nest egg, preferably a salary saving of 6 to 12 months. Make provision for emergency funds in case of employment crunch, family crisis, sickness, travel or any such unavoidable issues that might arise. Any amount you decide to invest or trade in, must be exclusive of the nest egg. This way, you will have a certain amount of security and freedom to wisely choose trade options best suited for you. Once you have decided the amount you want to invest in brokerage, you need to find the right avenue for your funds and a right person to handle them.
Before Opening a Brokerage Account
The first thing you need to do in order to open a brokerage account is to decide on the broker or brokerage firm you want to deal with. A brokerage account can be opened with two types of brokers or firms - one is the traditional or the full service broker and the other is an online stock broker or a discount broker.
Types of Brokers
  • Full Service Brokers: Traditional brokers provide research analysis, give advice on tax saving, suggest retirement plans and act as wealth managers for their clients. Their charges and commissions are comparatively higher. Some of the top ranking, full service brokers are Wells Fargo Advisors, Edward Jones and Raymond James.
  • Online Stock Brokers: Discount brokers only provide a platform for you to trade completely at your discretion. Hence, rates of online brokers are lower and they give greater flexibility for trade. Few of the best online stock brokers are Zecco, TradeKing, Scottrade, OptionsXpress, OptionsHouse and Vanguard.
Before opening an account with a broker or a brokerage firm, the credentials of the individual or the firm must be verified. A background check can be done using the SEC's IAPD Program or on the website for FINRA BrokerCheck. A broker must have Securities Investor Protection Corporation (SIPC) clearance and must have attempted and passed the Series 7. In case you are still not satisfied, you could use the Central Registration Depository (CRD). It contains information of all the licensed brokers, their qualifications, previous work employers, client allegations and instances of law violations.
Things to Look Out for in Potential Brokers or Brokerage Firms
  1. Background Check
  2. Registration and License
  3. Qualification and Experience
  4. Services Provided
  5. Commission Rates
  6. Transfer of Funds
  7. Opening Balance and Maintenance Fees
  8. Accessibility and Ease of Use (example: website, online portfolio, etc.)
  9. Withdrawal Fees for Transactions
  10. Inactivity Charges
Requirements for Brokerage Accounts
Now we come to what all is required to open a brokerage account. The broker or firm you choose, will have to open a portfolio for you, when opening your first brokerage account. The list of information you need to give will look something like this:
When You Open a New Account
Personal Information
  • Name
  • Address
  • Phone number
  • Type of account
  • Driver's license or other state-issued card (for ID Number)
  • Social Security or IRS Tax ID Number
Additional Information
  • Employment Details
  • Annual Income
  • Net worth
  • Investment Objectives
  • Form W-9: Payer's Request For Taxpayer ID Number and Certification
  • Letter Stating the Truth of Given Information and Signed by you
You will also have to deal with the broker specific details like:
  • Choice of Cash Management Program (instructions for uninvested cash)
  • Customer Agreement
  • Terms and Conditions Agreement
Next you will have to decide on the kind of brokerage account you want to hold. You have three options depending on how you want to trade in the stocks.
  • Cash Brokerage Account: They are funded by you in the form of cash or check. For buying stock in the trade market, the account should have funds enough to cover the cost and the broker's commission at the time of trade or latest by the settlement date (most brokers give three days for payment after the actual trading).
  • Margin Loan Account: As the name suggests, the broker pays part of the funds if needed. The limit of borrowing margin, is up to half the amount required to trade (set by the Federal Reserve). While the interest rates are minimal, it will have to be paid irrespective of profit or loss at the trade market.
  • Discretionary Accounts: In this type of account, the broker has full authority to trade without consulting the client or waiting for his approval.
You will then need to choose how you wish to transfer funds into your brokerage account and the type of account you wish to open. Some funding options are:
  • Automated Clearing House (ACH) Withdrawal
  • Wireless Transfer
  • Transfer Through Another Broker

Out of these, an ACH withdrawal is the most hassle free. As for the type of account you wish to open, there are many options. Some of them are listed below.
  • Individual Investment Account: It is like any other bank savings account and can be a traditional IRA (for savings on money after tax deductions) or a Roth IRA (for savings before tax payments)
  • Joint Account: You could open an account as Joint Tenants with Right of Survivorship (both parties enjoy equal rights and in case of death, the rights will be automatically transferred) or Joint Tenants in Common (both enjoy equal rights but in case of death, a will stipulates the heir).
  • Corporate Account and Specific Purpose Account: These are for corporations and associations or accounts for a specific reason (example - savings for an extended world tour).
  • Numbered Account: It is for those who want to keep their identity under wraps and an alias may be used by dealers while submitting the clients' details.
  • Joint Custodial Account: This is opened on behalf of minors. The custodian usually needs to be over 18 years but in some states like California and Colombia, the age limit is 21 years.

After you have opened the account, you can begin to trade in stocks. Keep a close watch on all the transactions made through your account and also on the best stocks to invest for you. Your broker must confirm every trade transaction and a monthly or quarterly reviews. It must be approved by a manager in case of a firm, and in case of an individual broker, it must be signed by him. The profit made on the trade will be credited to your brokerage account from where you can make a withdrawal any time you wish. You may also be provided with a Visa Check Card, which will allow you to withdraw cash from your brokerage account and use it for any other purpose like a normal debit or credit card.