What is a brokerage account: What’s up my people I want to talk to you real quick about brokerage accounts that’s what you’re going to need if you want to invest outside of your retirement accounts and before you go run off and sign up for one there’s a few things you want to know about and that’s what we’re going to dive into in this blog plus I’m going gonna jump on a computer.
So we can actually go through the steps so you can see what’s involved in opening up one of these accounts welcome to the blog my name is diamond and this is the place where personal finance intersects with the real world to help you achieve your financial goals and that includes investing. Let’s jump right in when you want to go out and buy a share of apple amazon or tesla or heck.
What Is a Brokerage Account?
A brokerage account is an arrangement in which an investor deposits money with a licensed brokerage firm, which places trades on behalf of the customer.
Maybe you want a little piece of every company out there through an index fund you don’t go to these companies and purchase these shares directly from them you need a middleman to act on your behalf and that’s what a brokerage account is it’s an account that you open with a brokerage firm or an investment company so that they can go out and execute your orders so they work like this you open an account and then you deposit some money once the money is in the account.
Now you have the ability to submit your orders so if you want to buy five shares of tesla all you need is enough money to pay for five shares you submit the order and then boom you now own a piece of tesla now there’s a few type of brokerage accounts and brokerage firms out there the first type is going to be your full service firm maybe you talk to someone and ask them hey how’s your portfolio doing and they was like i don’t know i got a guy.
Brokerage account definition
A brokerage account is the type of account used to buy and sell securities such as stocks, bonds and mutual funds. You can set up a brokerage account at a range of licensed brokerage firms — from pricier full-service stockbrokers to low-fee online discount brokers.
He handles all that that’s most likely a full service brokerage firm where you’re assigned a financial advisor and you turn your money over to them and they execute orders on your behalf they’re managing your money your portfolio for you now if you’re wise you’re being very cautious and you’re tracking what they’re doing so that you know where all the money is moving.
You know what’s going on in that account but you have a professional that’s there doing things for you and guiding you through the process another type that’s out there is your discount brokers and this is going to be more for your do-it-yourself investors you know like you and i we want to get a little more hands-on in our investments and we don’t mind if we need to ask a question or find out some new information but for the most part we want to be in control of what’s going on with our money.
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How do brokerage accounts work?
We want to pick and choose our investments choose when to go in how long and hold them and when to get out this is going to be your discount brokers and this is probably the most popular type that’s out there you’ve probably heard of some of these discount brokers things like vanguard fidelity charles schwab t rowe price these are companies who offer discount services as well as some full range services the last type of broker’s firm is the newest kid on the block.
This is your online brokers and this is where you can download an app open an account and now from your cell phone you’re buying and selling stocks through your brokerage account and these are things like weeble m1 finance acorn robin hood the list goes on and on and on but before you go run off and open these accounts there’s a few things you need to know about brokerage accounts the first thing you need to know is that these accounts are outside of retirement accounts.
Full-Service Brokerage Accounts
So when you want to invest in retirement you’re going to look for things through your employer like a 401k or 403 b or outside of your employer you’re going to invest in things like a ira and if you’re self-employed that’s a set ira or a simple ira but those are your retirement accounts a brokerage account is in addition to those and they’re completely separate and the rules are different the biggest thing you need to know about brokerage accounts is that they are taxed differently. Than your retirement accounts most retirement accounts have some type of tax advantage to them.
That’s why their retirement accounts but when you open a brokerage account it’s not protected by the same rules money made in a brokerage account is subject to capital gains tax and there’s two types of capital gains you have short term and long term short term is those gains that are made on investments that you have bought and sold within one year and they’re taxed at the same rate as your effective tax rate so if your effective tax rate is 30 percent you can expect to pay 30 percent on all the gains you made that fall within the short term capital gains window now a long-term capital gains is going to be those investments.
Discount Brokerage Accounts
You hold on to for a year or longer and generally speaking your long-term capital gains rate is going to be 15 so when you hear people telling you about the best stocks to buy and dividend investing and all this different stuff a lot of times you don’t hear them talking about the tax implications of those accounts and if you open a brokerage account yeah it’s as easy as downloading the app and getting money in there and start buying and selling but you have to be careful and understand that that money will be taxed which is not a problem as long as you understand that going into.
It now how do you choose which brokerage firm to open your brokerage account with because there’s literally hundreds of brokerage firms out there that’s going to depend on what is your goals with your investment what are you planning on investing in because if you want to be a day trader you’re going to open an account with a different company than a person who wants to buy and hold mutual funds or etfs because the cost is different and the research and tools you need at your fingertips is going to be completely different between a buy and hold investor.
Brokerage Accounts with a Regional Financial Advisor
A day trader and even if you’re a buy and hold investor and all you want to invest in is index funds there’s still some things that you’re going to need to look at between your different brokerage firms so that you make sure that you’re getting the best deal possible for example it would make sense if you wanted to buy fidelity funds and you opened a brokerage account with fidelity you can buy any of their funds at little to no cost but what if you want to buy some vanguard funds within your fidelity or maybe you want some tea row price or Charles Schwab.
What is that going to cost you and that’s the type of research you want to look at like i know for example if i have a vanguard account it’s cheaper for me to buy fidelity funds through vanguard than it is for me to buy vanguard funds through fidelity and that’s the type of things that you want to be researching when you’re looking at these different investment companies so knowing what you want to buy before you ever open an account is going to be crucial in making the right decision off the back.
How to choose a brokerage account provider
There are two main options that meet the needs of most investors: online brokers and robo-advisors. Both offer retirement accounts and taxable brokerage accounts.
“You want to be careful with which company you open your brokerage accounts with,” says Wendy Moyers, a certified financial planner at Chevy Chase Trust in Bethesda, Maryland. “And you should be walking in with an awareness of what you’re going to be investing in. You want to do a little research.”
You want to limit the number of brokerage accounts you have down to as small a number as possible i’m talking one maybe two you don’t want to have four or five online brokerage accounts plus four different apps going on your phone because that’s going to make it a nightmare for you at tax time because you’re going to get a statement from each one of these companies and now you report all your transactions from each one of these companies in your taxes and it’s just no need to do that anymore because now through one brokerage account.
How to open a brokerage account
You can buy hundreds of funds from different investment companies and a lot of these come with no transaction fees which means if you want to buy a third-parties fund you don’t have to pay any extra money so if i have a vanguard account and i want to buy a t-ro price fund i don’t have to pay anything extra to do that so it’s no need for me to open another brokerage account over at t row price it’s really only three steps to opening a brokerage account.
So let’s jump on the computer so i can show you what that looks like and then we’ll come back here to wrap it up for this example we’re going to open a brokerage account with vanguard so once you’re on your site you click on personal investor from here at the top you just click on open account and from here you’re going to select new account or if you’re moving a brokerage account to vanguard you would select begin my transfer.
We’re gonna open a new account here’s actually how are you gonna find a new account and for this we’re gonna use an electronic transfer from our bank click continue and if you already have a vanguard account you can click here and all your personal information will be pre-field but for now we’re gonna say no i’m new here and the account process is as easy as one two three choose your account type complete the online application and wait for the confirmation and what you need is your routing number for your bank and your current employer’s information so i’ll click continue here and on step one says tell us about you.
|Brokerage account||Retirement account|
|Taxes||May incur capitals gains tax on investment income||Typically no capital gains; tax-deferred or tax-free growth|
|Contributions||Unlimited||Caps on annual contributions|
|Withdrawals||No limits or penalties||Penalties for withdrawing before a certain age, unless exceptions are met|
|Used primarily for||Stock trading, options trading, additional long-term investments after maxing out retirement accounts||Long-term growth, retirement savings|
Why are you investing and since we’re doing a brokerage account this will be a general savings account and you select whether you want to have this as an individual account a joint account or are you doing it in the name of a trust for now we’ll hit individual click continue and what is your primary investing goals and this will be up to you but for this one we’re going to say we’re looking to grow our money and we’re looking to generate income off of it at some point and the source of your funds is self-explanatory for this one.
We’re going to say it’s just coming from our regular salary and you click continue now at this point i’ll stop here but here you can see you’re actually to put in your personal information your name date of birth so security number email and once you click continue here you’re just going to enter your bank account information in step 2 review and sign your documents and sign up for web access and the fifth step is to confirm everything and wait for that confirmation and it’s just that simple to sign up and create a brokerage account as.
You can see it’s not that difficult to open a brokerage account and i’ve already talked about the taxes on those accounts but i want to leave you with one more tip and that tip is to make sure that your retirement is on track and you’re utilizing your retirement vehicles and the reason for that is because those accounts have some type of tax advantage meaning you’re either saving money on your taxes now or you’re paying taxes on that money today but the growth is tax-free and you’re going to be able to pull that money out without paying taxes in the future.
Conclusion of what is a brokerage account
So it’s important to make sure that your retirement is on track before you start investing in your brokerage account now i know a lot of people say they don’t want to wait to retirement because most retirement accounts have some type of age restriction on it most commonly that’s 59 and a half and a lot of people say i don’t want to wait till i’m 59 and a half or 60 years old to retire but it makes a lot of sense to make sure that your days from 59 or 60 years old until death is squared away and paid for by funding those retirement accounts before you worry about being able to take care of yourself between now and 59 and a half.
So that’s why i always recommend people have their retirement on track before you start working on your brokerage account if you got value out this video if you learned something from this video then let me know by giving it a thumbs up and subscribe to the channel for more investment videos just like this and if you want to invest but you’re sitting there thinking i would love to do all this but my debt is in the way if that’s you.
Then i want you to click on this playlist right here that’s talking all about how to get out of debt using real world no-nonsense advice and until next time i’m diamond peace a lot of people mistakenly believe that if they make enough money in their life they’ll be able to retire the truth is you have to invest the money you make and that is how you retire