Introduction to online brokerage accounts
With the help of online trading platforms and investing apps, more people than ever are getting involved in trading stocks online. But with so many investment options to choose from, getting into online trading can seem daunting, especially for new investors.
Read on to learn more about how online brokers work and for a list of some of the best online brokers and online trading platforms for beginners.
What is an online brokerage account?
An online brokerage account is a low-cost product offered by an investment company that allows individuals to trade on the stock market and personally manage their trading portfolios online.
Unlike a traditional full-service broker, an online brokerage (also known as a discount broker) puts the decision-making process directly into the hands of the individual. This allows them to personally buy and sell assets like individual stocks, bonds, exchange-traded funds (ETFs), mutual funds, and cryptocurrency instead of delegating those tasks to a broker or financial advisor.
Many beginner investors choose online trading platforms, mobile apps, and robo-advisors for their convenience, flexibility, and speed. These investing platforms require less overhead costs than a traditional brokerage, so investment companies can offer them to customers at much lower rates.
Still, online trading platforms offer many valuable resources for both beginners and experienced active traders.
How brokerage accounts work
A brokerage account is an investment account that you use to trade assets online. The brokerage serves as an intermediary between you (the investor) and the market where these assets are traded.
Before, you had to go to an investment firm in person to open an account, and a stockbroker would offer investment advice and make trades on your behalf. Now, since the spread of online banking and investment services, you can open an online brokerage account that allows you to engage in self-directed trading.
After you've opened an account, you can transfer cash from your bank account into your trading account. You then use those funds to buy assets that reside in your brokerage account until you decide to sell them, either for a profit or a loss.
Types of online brokerage accounts
Cash accounts
As the name suggests, a cash account requires you to deposit funds to cover the full cost of any purchases you want to make with your account. With a cash account, you can only buy as many securities as you can afford with your own money.
Margin accounts
With a margin account, you can use cash or assets already in your account as collateral to borrow money for further transactions.
However, like any other loan, you’ll be required to pay interest on the money you borrow. If your investment loses value, the brokerage firm might make you pay back your margin debt immediately. If you can’t pay it back, they can sell off your investments to cover it.
Other types of accounts
Besides your cash and margin accounts, you can also open an options account. These accounts require a bit more experience, and you'll often be required to sign an agreement acknowledging that you understand the risks involved in options trading, which are much greater than a margin account
You can also open IRA or 401(k) retirement accounts where you trade assets to save up money for retirement. These accounts are designed for long-term investing, so there are limits on the types of trading you can do in them.
Is your money safe in a brokerage account?
Most online brokers are closely regulated, and the cash and assets in your account are insured by the Securities Investor Protection Corporation (SIPC), meaning you'll be covered if the brokerage firm goes bankrupt.
All trading — whether online or not — comes with a certain degree of risk since you can always lose the money you invested, and the SIPC doesn't cover losses due to investment mistakes or poor trading advice.
In other words, the money in your brokerage account is only as safe as the investments you buy with it.
What do you need to open a brokerage account?
Opening a brokerage account is similar to opening a checking or savings account. For online trading platforms, the process is relatively straightforward and often only takes a few minutes
While the specific requirements for opening a brokerage account vary, here are some of the documents or details you might be required to provide to open your account:
- Your social security number or tax identification number
- Your driver's license or other government-issued photo ID (like a passport)
- Banking information
- Financial information, like your annual income
- Information on your employment status
Three best online brokerage accounts for beginners
When choosing an online brokerage account or online trading platform, there are several factors to keep in mind, like account fees, commissions charged for different kinds of transactions, the minimum account requirements, and what types of financial products you can buy.
You also want to keep an eye open for extra features, such as personalized support, research, and educational resources.
With those factors in mind, here are three of the best online brokerage accounts for beginners:
TD Ameritrade
If you do some research online, you'll quickly see that TD Ameritrade (now owned by Charles Schwab) sits on the top of many lists of the best online brokerage accounts for beginning investors.
TD's thinkorswim platform is flexible and easy to use, charges zero commissions on stocks and ETF trades, offers tailored customer support and comprehensive stock trading research, and supports paper trading. There’s also no account minimum, so you can get started right away with a low balance.
If you want to trade using a margin account, you'll find that the rates are a bit higher than the competitors. You also won't be able to trade in cryptocurrency.
Robinhood
Robinhood is a popular mobile trading app that was the first of its kind to offer zero-commission stock trading.
The app is intuitive and easy to use and allows for fast self-directed trading in stocks, ETFs, and cryptocurrency. Robinhood also lets investors buy fractional shares of thousands of stocks, which means you don't need to have a lot of capital to get started.
While the app is slick and lightweight, it doesn't offer much in terms of customer support and market research. For that, you'll have to sign up for a Robinhood Gold membership for $5 per month.
Fidelity
Fidelity is one of the most affordable online brokerage accounts.
Fidelity's well-designed app, quality research, low fees, commission-free trading, and zero account minimum make it one of the most popular online trading platforms for beginners.
The bottom line
There has never been a better time to open an online brokerage account. With a wide range of competing products to choose from, you're sure to find the best one for your needs if you ask the right questions and take the time to develop a sound investment strategy.
In your search for the best online brokerage account for beginners, it's essential to keep in mind that while trading securities can be a fun and exciting way of generating extra income, it also involves a certain amount of risk.
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