If you feel that you are ready to begin investing your money, it can be confusing understanding where to start. The following is some information we have compiled to help you make your decision and get started.
Have A Safety Net In Place
Before you start investing, it is generally recommended that you have an emergency fund set up in case you need access to some quick money. You never know when tragedy may strike like losing a job or footing unforeseen medical costs, so you want to make sure you have yourself covered. Most financial experts recommend that you have enough money saved to live off for at least 6 months. You should also consider putting the money in a regular savings account, a money market account, or CD (certificate of deposit).
What Type of Investment Do You Want To Make?
Spend some time researching what type of asset classes you would like to invest in like mutual funds, stocks, bonds, etc. In addition what type of account do you want to open? Do you want to open a taxable account, or an IRA or 401K account that is tax-deferred? These are all questions you should be ready to answer when you reach the next step of opening a brokerage account.
Basic Broker Service Vs. Full-Service Broker
If you are ready to invest your money in stocks, mutual funds, bonds, ETFs, you won?t be able to use your checking or saving account, so your next step should be to think about opening a brokerage account. Keep in mind that the types of services that are offered by your broker can vary, as can the associated fees to your account.
Most online brokers simply complete the action of executing the trades that you request. However, it is possible to get a full-service broker or financial planner that will work to provide investment advice and portfolio management services. Generally the latter means that your financial planner will choose what trades to execute which is an option to consider if you foresee that you won?t want to do your own research and trade decisions. However keep in mind that these financial planners generally charge a management fee, versus a basic broker service which charges commission fees on individual trades.
Be Ready To Put Down A Minimum Deposit For Your Account
You are generally required to have a minimum deposit in your brokerage account from which the broker can withdraw the money to execute your trades. Minimum deposits can sometimes be in the amount of $10,000 and if you plan to trade on margin this amount can go up. It is possible, however, to find a brokerage account with a $0 minimum required balance, like a Merrill Edge account.
Trade and Commission Fees
Most brokerage firms charge a cost per trade, which is usually a fixed price. Some brokerages however may determine their price based on the number of shares that are in you trade.
Discount Broker Vs. Brand-Name Broker
If you are not looking to place trades very frequently and speed is not an important factor for you, you may want to consider going with a discount broker that offers a lower rate per trade.
A common myth is that brand-name brokers offer better trade execution quality vs. discount online brokers, but a recent study from Nerdwallet found that only 12% of commission fees are used for trade execution at top brokerage firms. The rest of the money goes towards paying firm expenses like advertising and overhead expenses.
To compare various brokers, use NerdWallet?s Brokerage Comparison Tool.
