Do you have lazy cash sitting around, not earning you anything? It needs a home. It’s easier than you might think to open a brokerage account at Fidelity. Fidelity.com explains:
- Anyone who’s age 18 or older can open a brokerage account.
- One type of brokerage account is a cash account, which allows you to buy investments with money you move into the account.
- More advanced investors may want to open a margin account, which allows you to buy investments with a loan from the brokerage firm.
- If you make a profit when selling investments in a brokerage account, you may have to pay capital gains taxes.
You might already invest money in a 401(k), IRA, or health savings account (HSA)—or all of the above—but you might consider opening a brokerage account too. Unlike retirement accounts or an HSA, you don’t have to wait until a certain age or have qualified expenses to withdraw your contributions or investment earnings. Anyone at least age 18 can open a brokerage account in a few minutes at a brick-and-mortar or online brokerage firm. Here’s how to open a brokerage account in 6 steps.
1. Figure out where to open a brokerage account
Ask yourself: What are my primary investing objectives? For example, if you want the ease and convenience of having everything in one place, you could consider the firm where your company has its 401(k) plan or where you already have an IRA.
Considerations could also include whether the company offers account features you like and will use, responsive customer service, how easy it is to navigate its website and/or app, and how much it charges in commissions and fees.
(Psst … learn about investing at Fidelity, which charges $0 account fees and has no minimums for opening or maintaining a brokerage account.1 Parents with a Fidelity account can open a youth brokerage account on behalf of their teens ages 13 to 17.)
2. Decide what kind of account you want
You can approach investing within a brokerage account in a few different ways. You might opt to DIY your investments and manage them yourself. Or you could work with a financial professional to get help selecting and managing your investments for a fee. For something in between, you might consider a robo advisor, which can help you build a portfolio using technology that considers your financial goals, risk tolerance, and time horizon, among other variables. Robo advisors typically have lower costs than working directly with a human financial professional.
You’ll also need to decide if you want a cash account or a margin account. A cash account means you buy investments with money in the account. With a margin account, you can buy with the cash you have or borrow money to buy securities (hence the phrase “buying on margin”). Only investors who fully understand the risks, including the possibility of magnified losses, should consider opening a margin account, which is governed by many rules.
3. Fill out the application
A brokerage account application will usually ask for personal details like Social Security number and residential address, employment info, investment profile, and, if you’ll be investing online, bank information. The broker-dealer has an obligation to verify your identity, which is often done through a third party, so you may be asked to provide documentation/ID. The process could take only a few minutes online.
4. Fund your account
Once you open a brokerage account, you can link it to a bank account and transfer money. Once you’ve been approved to trade and have funded your account, you are ready to invest. Keep in mind that some securities require minimum investments, though you may be able to start investing by buying fractional shares, or in dollar amounts instead of number of shares, in certain stocks and exchange-traded funds (ETFs).
5. Invest using the cash in your account
Once you’ve transferred money into your brokerage account, you may want to consider investing in products beyond a core cash or sweep account. While these accounts pay interest, you could be missing out on the higher potential gains of other investments that carry a greater risk of loss.
In addition to one-time investments, you may choose to set up recurring investments, which is when you buy individual stocks or funds with the same amount of money at regular intervals. This employs a strategy known as dollar-cost averaging. Continually investing, regardless of market prices, may help to reduce the impact of volatility on the overall purchase. For the strategy to be effective, you must continue to purchase shares when prices are up and when they’re down.
6. Check in on your investments
Whether you are doing it yourself or working with a financial professional, monitor your investments periodically. Fidelity recommends checking in on your portfolio at least annually, after a major change in financial circumstances, after a life event like marriage or having a child, or after big market swings to see if your resulting portfolio still aligns with your financial goals, risk tolerance, and time horizon.
For instance, when you first invested, you might have split investments into 60% stocks and 40% bonds. But due to market fluctuations, you might now have 75% of your money in stock investments with bonds at 25%. Depending on your specific goals, you can adjust your holdings by rebalancing, or buying and selling investments to help keep a portfolio in line with an investment strategy.
Because a brokerage account is a taxable account, you may receive tax form 1099-B if you sold any investments (but not if you only bought them). If you made a profit when you sold, you may have to pay capital gains taxes. If you have investments that are down, you may be able to tax-loss harvest, a strategy of selling investments for a loss to offset realized gains. You may also receive tax form 1099-DIV if you made more than $10 in taxable dividend income and/or 1099-INT if you earned more than $10 in interest income. Consult a tax professional for your situation.
Action Line: When you want to talk to an adviser about a plan for your retirement, and what to do with your lazy cash, email me at ejsmith@yoursurvivalguy.com. In the meantime, click here to subscribe to my free monthly Survive & Thrive letter.
