How to open a stock market account

A low-cost brokerage account will allow you to buy individual stocks, mutual funds, exchange-traded funds, and other investments outside of your employer’s retirement account. You can open an account, deposit money and execute transactions online with a computer, tablet or even a smartphone.

But first you need to choose a brokerage firm. Which one is right for you depends on the type of services you want. To get started, check out by Kiplinger annual survey of online brokerages, which rates nine online brokerages on a variety of measures, from fees to breadth of investment offerings to customer service.

What you need to open an account

Brokerage companies make it easy to open an account online, provided you meet a few requirements. You must have a valid social security number and a legal residential address in the United States in the 50 states, the District of Columbia, or Puerto Rico, among others.

You’ll need to choose whether you want to open a taxable (non-retirement) account or a retirement account (like a traditional or Roth IRA). Both account types allow you to buy and sell stocks, mutual funds, ETFs, and other investments.

One thing you won’t need is a ton of cash. Many online brokerage firms, including Schwab and Fidelity, do not require a minimum to open an account, although some firms may require a modest balance of, say, $500 or $1,000. And at most brokerages, trading is free.

You can contribute as much or as little as you want to a taxable brokerage account in any given year. But retirement accounts come with annual contribution limits. For example, you can invest up to $6,000 in an IRA each year if you’re under 50 or $7,000 if you’re 50 or older.

Taxes

There are tax consequences to consider if you trade securities in a taxable brokerage account. Any profits you pocket when you sell an investment will attract capital gains tax. The amount you owe depends on how long you have owned the investment. (Transactions in a traditional brokerage account or Roth IRA do not create a taxable event as long as the money remains in the account.)

Say you buy 10 Apple shares in your brokerage account for $165 per share and the price appreciates to $300. Your shares are worth $3,000, for a gain of $1,350. If you sell all your shares and have owned them for less than a year, you will pay the short-term capital gains rate – your ordinary tax rate – on those profits. But if you’ve held the shares for a year or more, you’ll pay lower tax (the long-term capital gains rate) of 0%, 15%, or 20%, depending on your marginal tax bracket.

What happens if the stock drops in value and you sell? You can use these losses to offset capital gains made on other investments, as long as you match short-term losses with short-term gains and long-term losses with long-term gains. If you end up with a surplus of losses, you can deduct up to $3,000 of losses from your income and carry forward unused losses on your future tax returns.

Hire a (Robo) Pro

If you’re nervous about trading stocks or funds on your own, or just don’t want to bother, consider the low-cost, algorithm-driven advisory services offered by many trading firms. brokerage. You fill out a short online questionnaire about how long you plan to invest (a “time horizon”) and your tolerance for risk, and a computer model recommends a portfolio of low-cost ETFs that’s right for you.

These robo-advisors, as they are commonly called, charge a low annual fee and do all the investing work for you, from rebalancing your portfolio to shifting your assets to an appropriate mix over time as you grow old. Brokerage firm Betterment, for example, offers a robot service for an advisory fee of 0.25% to 0.40% per year, depending on account balance, and its wallets charge a typical annual spend ratio of 0. .11%. For our take on 12 bots, check out Finding the Right Robot Advisor for You.

How your account is protected

Assuming your brokerage firm is a member of the Securities Investor Protection Corp. (and most are), your account is insured in the event your brokerage fails.

Brokerages are required by law to segregate client investments from securities held by the brokerage firm, an arrangement that offers some protection against fraud. But if the company goes bankrupt and clients’ assets disappear due to theft, fraud or unauthorized transaction, SIPC will protect each account held by a client up to $500,000 for securities. and cash (including a $250,000 limit for cash only). SIPC will not protect you against investment losses and will not become involved until the company has exhausted all other options, such as merging with another brokerage firm.

The risks of margin trading

If you’ve been following the meteoric rise of GameStop stocks and other so-called meme stocks over the past year, you’ve probably heard a bit about margin trading. When you trade on margin, you borrow money from your brokerage firm, using your cash and securities as collateral, to buy securities. These accounts allow you to increase your buying power (regulators allow you to borrow up to 50% of the purchase price), but you usually need to apply and qualify with your brokerage firm.

Margin trading is mainly for sophisticated investors or speculators because it is risky – you can lose more than you have invested. And margin accounts charge high interest rates (Fidelity charges 8.325% on loans up to $24,999). Margin rates are also variable and will increase when the Federal Reserve raises short-term interest rates. There is also a minimum amount of collateral to maintain. How much may vary: The Financial Industry Regulatory Authority, the self-regulatory arm of the brokerage industry, requires that you keep at least 25% of the value of securities on margin, but some companies charge more.

If the market goes down, you may need to add cash or securities to restore the minimum maintenance amount, the dreaded margin call. If you don’t, your broker has the right to sell your investments to cover it. This could magnify your losses, as your investments will likely be sold at a loss. Additionally, you are still obligated to repay the margin loan to the broker.

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