Investing is a good way to grow your money. However, being new to investing makes what’s already new, even more unclear and stressful. Thankfully, there are online brokerage accounts that make things a little easier to get started.
A brokerage account is an account that is used to buy stocks, mutual funds, exchange-traded funds, bonds, and other investments. Here’s are the different types of brokerage accounts available:
- Common Stocks: This is representative of ownership in a business
- Preferred Stocks: These payback higher than usual dividends.
- Bonds: This includes U.S. Treasury securities, savings bonds, corporate bonds, and so forth.
- Real Estate Investment Trusts: (REITs) Represent groups of real-estate or real-estate-related assets. Some can include specialty types of real-estate such s hotel REITs which are targeted towards owning and operating hotels.
- Money Markets and Certificates of Deposit: Money markets can either represent ownership in highly liquid mutual funds that hold cash and fixed-income investments. Or, loans people make to banks in exchange for a fixed rate of interest.
- Mutual Funds: Investment portfolios that are owned by several small investors who buy shares in the portfolio. Instead of buying and trading throughout the day, all orders are placed at the end of the day all at once. An example of a mutual fund would include index funds.
- Exchange-Traded Funds: Also known as ETFs, are a type of security that closely resembles mutual funds. ETFs are listed on exchanges and can be traded like stocks.
- Master Limited Partnerships: Or MLPs-these are complex partnerships with a tax advantage, but have several high-risk tax consequences.
So how do you know which brokerages are best, or which brokerage account is best for you? Questions you’ll be asked, and expected to have answers to, will vary. However, after surveying a few options ourselves, we felt the following was a good compilation of questions to always keep answers handy to:
Do you want a cash account or margin loan account? What this means is in a cash account, you’ll end up paying for your securities in full at the time of purchase. In a margin loan account, even though you have to pay for the securities in full in the future, your broker or another lending professional can lend you funds at the time of purchase using your securities as collateral. Keep in mind, with a margin loan account, you will incur interest costs. Other risks that are possible from purchasing margin loan accounts comes about when or if the value of your securities declines significantly. This will require some form of a cash deposit, or you will have to sell your securities.
Another aspect to think about is how you want to manage your uninvested cash. At times, there can be cash in your account that hasn’t been invested. This usually happens when investors don’t specify how they want their money invested. The extra cash will generally be swept into a cash management program.
Lastly, who is going to be the decision maker for your account? Typically, it’s the person that opens the account. However, if you decide to appoint “discretionary authority, in writing to another person (in most cases, it is the financial professional), this person may invest your money without consulting you about cost, type or timing.
The answers to all of these questions come after an instrumental amount of research, knowing what you want to do with your money, what brokerage you think is best for you and your investment needs, and what will produce the most, are questions that don’t nearly have the easiest answers. Charles Schwab, Fidelity and Robinhood are all good starting points. Whatever brokerage you choose to go to, know that the right person will take care of your portfolio and will never force you to rush into a decision or investment.