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How to open a Brokerage account:
The most common method to buy stocks is to use a brokerage. It used to
be that only the wealthy could afford a broker since only expensive,
full-service brokers were available. Charles Schwab changed all that by opening
the first discount brokerage firm and with the internet came the rise of deep
discount online brokers such as Ameritrade. Because of them nearly anybody
can now afford to invest in the market.
Full-service brokerage firm
- Full-service brokerage firms usually offer their clients a range of
services in addition to executing their buy and sell orders. For
example, the firm may provide investment advice, help in developing a
financial plan, or strategies for meeting financial goals. Firms usually
have access to full-time research departments and investment analysts,
who provide information the firm shares with clients.
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What
does a Broker do?
Brokers are the people who handle customer orders to buy and sell
securities. In the same way that real estate broker act as a
middleman between buyer and seller of a house, a
stock broker acts as a middleman between the securities that trade on
the market and the investors that buy them.
To be a stockbroker in the United States, you must pass two
licensing examinations from the NASD: the Series 7 and the Series
63. These exams prove that a broker knows about what he/she is
selling to you as well as all the regulations and laws in the
securities industry.
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However, in exchange for
providing these services, these firms tend to charge higher commissions
and fees than discount brokerage firms or firms that operate exclusively
online. However, some full-service firms offer online services and
reduce their fees for transactions handled though a client's online
account. Furthermore, full-service brokers are compensated based on how
much you trade, not the performance of your portfolio. This can lead to
your full-service broker advising you to trade when you don't need to
(called churning when excessive). The full-service category brokers
includes: Merrill Lynch, Salomon Smith Barney, Morgan Stanley Dean
Witter and others.
Discount brokerage firm - Discount brokerage firms charge lower
commissions than full-service brokerage firms when they execute
investors' buy and sell orders but may provide fewer services to their
clients. For example, they may not offer investment advice or maintain
independent research departments.
However, because of the extensive information and online account access
that's available on most brokerage websites, the traditional differences
between full-service and discount firms are less apparent to the average
investor. The best-known discount brokers are Charles Schwab, and TD
Waterhouse. Fees are kept low because discount brokers offer fewer
products but most offer no-load mutual funds without transaction fees.
Brokers are paid on salary and not on commission.
Deep Discount Brokers or
Online Brokers - A third category of brokerage called online brokers
who offered steep discount on commissions with online trading systems. Ameritrade and E*Trade
are a good example of that.. Today, hardly a discount broker exists that
doesn't offer online trading. Some online brokers such as Scottrade and
E*Trade have local branch offices and are providing access to quality
research. Full service brokers are on the other hand are starting to
offer online trading options.
Commissions and Fees:
Every brokerage charges a different commissions to
trade stocks. Commissions on trades vary based on things like the type of trade (e.g.
market order versus limit order). Even the way the trade is done impacts
the price; commissions are different for online orders, touch-tone phone
trades, and broker assisted trades. See the comparison of discount and
online brokers Commissions and fees below:
| |
Scottrade |
Ameritrade |
E*Trade |
TD Waterhouse |
|
Branch
Offices Nationwide |
173 |
0 |
37 |
150 |
NASDAQ
Market Orders |
$7 |
$10.99 |
$19.95 |
$17.95
+ $0.01/share over 2500 shares |
NYSE
& AMEX
Market Orders |
$7 |
$10.99 |
$14.95 |
$17.95
+ $0.01/share over 2500 shares |
NYSE,
AMEX, & NASDAQ
Limit Orders |
$12 |
$10.99 |
$19.95 |
$20.95
+ $0.01/share over 2500 shares |
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OPTIONS
Equity or Index
Market Orders
|
$7
+ $1.50/contract |
$10.99
+ $1.50/contract
|
$20
+
$1.75/contract |
$17.95
+ $1.75/contract |
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Broker-Assisted
Market Orders |
$17 |
$24.99 |
$49.99 |
$45.00
+ $0.01/share over 2500 shares
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Real-Time
Streaming News from Dow Jones
|
Free |
$29.99
/Month |
Not
Available
|
Not
Available |
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Inactivity
Fee
|
$0 |
*
$15/qtr |
*
$25/qtr |
*
$25/qtr |
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Margin
Interest Rate On $7,500 Debit Balance |
5.45% |
6.25% |
9.25% |
6.75% |
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* Inactivity fees imposed may be waived if your
account meets minimum balance and/or trading requirements. This is
comparison as of February 2003 |
The Hidden Fees - Beyond
the commission per trade, look for the following hidden fees:
· Fees for transferring assets both into and out of an account
· Account maintenance fees
· Inactivity fees
· Fees for not maintaining a minimum balance
· Interest on margin loans
· Sales charges on certain securities such as mutual funds
Different types of Accounts - There
are four major choices you have when opening an brokerage account.
- Cash Account: The basic account where you deposit cash to buy stocks,
bonds, mutual funds, etc.
- Margin Account: Margin
basically allows you to borrow from your broker against the cash and
securities in your account.
- Option Account: This type of account allows you to trade options, which are much
riskier investments than stocks or bonds.
- IRA account: For people looking to setup an
individual retirement account.
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What is a Margin Account?
Margin accounts allow you
to pay for part of the cost of buying stock with money that you,
in effect, borrow from your broker. You use the account to buy on
margin, sell short, or day trade. To use the account to
buy on margin, you must have a balance of cash and securities
equal to 50% of the purchase you wish to make.
When you buy on margin or sell short, you pay interest on what you
borrow but don't have to repay the loan until you sell the stock —
ideally, at a large enough profit to cover the interest. If the
value of the stock that you bought on margin or sold short
declines, and you don't have enough assets in your account to
cover the margin requirement, you may get a margin call
requiring you to deposit more money or securities to maintain your
margin requirement. If you don't, your positions will be
liquidated. Learn more on
Margin Trading. |
Every brokerage has different terms and conditions for opening an
account. There is a wide range of minimum deposits, varying anywhere
from $500 to $2500. Make sure you read the fine print beforehand. There
is nothing more irritating that spending the time to fill out
application forms only to find out you don't have enough money to open
an account. More and more online brokerages don't
require a minimum deposit at all. One such example of this is
sharebuilder.com, there are no minimums to open an account and costs can
be as little as several dollars a month.
Another option for those without a large bank account is through
Dividend Reinvestment Plans (DRIPs). They allow you to circumvent
brokers through buying stock directly from the companies.
If you already have a brokerage account and wish to move it to another
broker the process is quite easy. Just contact the brokerage you are
signing up with and they will either do the paperwork for you or help
you with the proper forms.
Next-->> What are DRIPs?
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