How to Open an Investment Account In 6 Steps

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According to the U.S. Department of Labor, the average American spends about 20 years in retirement. Once you retire, you won’t have any income from a job, so you need to save as much money as possible while still working.

One way to grow that money is to buy stocks, bonds, ETFs and other investment options. As the value of your investments increases, you can use the power of compound interest to build wealth. To get started, learn how to open an investment account and make your first deposit.

What Is an Investment Account?

An investment account, also known as a brokerage account, holds cash and securities, which are investments used to earn profits through someone else’s efforts. For example, if you buy shares of Amazon stock, you’re hoping to turn a profit based on how well the company performs. There are two types of brokerage accounts:

  • Cash account: You use the cash in a brokerage account to buy securities. You must pay the full value of those securities out of your account.
  • Margin account: If you have this type of account, the brokerage lends you money to buy stocks, bonds and other securities. You have to pay interest on the funds you borrow.

Once you have an investment account, the brokerage firm acts as an intermediary, buying and selling securities on your behalf. One of the main advantages of opening a brokerage account is that you don’t have to worry about limits on your contributions or withdrawals.

Other types of retirement accounts limit the amount of money you can contribute annually. For example, if you’re under 50, you can only contribute $6,500 per year to a traditional IRA. These limits make it more difficult to build wealth. Some accounts also have rules regarding when you can withdraw your money. If you make an early withdrawal from a 401(k) account, you may have to pay a tax penalty, leaving you with less cash on hand.

Steps to Open an Investment Account

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Opening an investment account is fairly similar from one brokerage to another. Follow these steps to choose the right account for your needs.

1. Determine Your Needs

Before you start researching brokerage firms, take time to identify your needs. There’s no one-size-fits-all approach to investing that works for everyone, so you should make decisions based on your personal goals and level of comfort.

The first step is to think about how involved you plan to be with the investing process. If you want to choose your own stocks and decide when to sell them, you may want to go with a brokerage that offers robo-advising. A robo-adviser collects information about you and uses it to create an investment portfolio. You can monitor that portfolio as often as you’d like, making it easier to reach your investment goals.

If you’re uncomfortable managing your investments, look for a full-service brokerage. These firms have financial advisors available to monitor your portfolio and offer personalized recommendations. A full-service firm typically has higher fees, but you may be able to make up the difference with higher investment returns.

2. Setting Financial Goals

You also need to think about your financial goals. If you’re in your early 20s, you have plenty of time to invest and save for retirement, so you may be comfortable taking a few risks. As you get closer to retirement age, you need to be a little more conservative. If you take big risks when you’re older, you won’t have as much time to make up for any losses.

The type of account you need also depends on how you want to use your funds. Some accounts are designed for short-term use, while others are for long-term investing. For example, if you plan to use the money to pay for a child’s college tuition, you may only need to invest for 10 or 15 years. If you’re planning for retirement, you may not need to dip into your funds for 40 or 50 years, giving you a little more flexibility when creating an investment strategy.

3. Research Brokerage Fees and Investing Requirements

As you compare brokerages, take note of each company’s fees and investing requirements. Many firms charge a commission on each trade and fees for account maintenance, investment research and money transfers. Every fee eats into your available balance, so think carefully before choosing a brokerage.

4. Compare Available Account Services

You may not need additional services if you monitor and manage your investment decisions. That said, many brokerages offer investment research, trading software, mobile trading and other account features designed to enhance your experience. Look for a brokerage that offers the services you need at a reasonable price.

5. Fill Out the Application

You must officially open an account once you find a brokerage that meets your needs. This involves filling out an application and providing information to help confirm your identity. For example, you may be required to show your passport or driver’s license. This helps prevent thieves from using stolen identities to open trading accounts.

6. Make Your First Deposit

Finally, you need to deposit money in your new account so that you can start buying securities. Most brokerages accept wire transfers or direct transfers from another bank account. Once the transfer goes through, you can start buying investments.

Start Building Wealth

Investing in securities is a great wealth management strategy to utilize as you prepare for retirement. Remember that the markets fluctuate daily, so no advisor can promise a specific return on your investment. It’s also possible to lose money, especially if you make decisions based on emotion rather than careful financial planning and research into which securities will likely stand the test of time.

You might also be interested in: How to Make Money Investing in Gold [4 Options]

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