Before You Open a Brokerage Account

Before you can begin investing, you must open a brokerage account (for those of you who don't know what this is, read the article "What is a Broker" in the Beginner's Corner). As an investor, choosing a broker is one of the most important decisions you'll have to make. Here are five things you want to look for before you open an account.

1. Full Service Broker vs. Discount Broker

There are two different types of brokers; traditional (also known as "full service") and discount. If you open decide to open an account with a traditional brokerage firm, you will work one-on-one with a personal stock broker. He or she will offer investment ideas, prepare reports about your portfolio, give you a run-down of how well your investments are doing, and generally be available with a single phone call or email to buy or sell stocks, bonds, mutual funds, or other investments for your account. In addition, traditional brokers offer a variety of different research sources to their customers. In exchange for this one-on-one service and guidance, you will be charged a significantly higher commission (we talk more about the price consideration below.) A few examples of this type of brokerage firm are A.G. Edwards, Morgan Stanley Dean Witter, and Merrill Lynch. (*Note: Merrill Lynch now offers both full service and discount brokerage accounts to customers.)

Discount brokers, on the other hand, are geared toward the do-it-yourself investor. Generally, they will not offer investment advice. They will simply execute orders once you've decided to buy or sell an investment. Instead of working with the same stock broker, you will do most of your trading online, or if you decide to call in your order, with the first available broker. Recently, discount firms have been offering research that is on par with those offered at the traditional brokerage firms. Some excellent examples of these types of brokers are E-Trade, Ameritrade, and TD Waterhouse, to name a few. In exchange for giving up personal contact with a regular broker, investors will be charged a significantly lower commission.

Commissions

Although the largest difference in between traditional and discount brokers is the cost of each transaction, differences in commission prices between two firms of the same kind can be tremendous. One discount broker may charge $30 per trade, whereas another may charge no more than $8. In some cases, the higher price means higher service, faster execution (i.e., your buy and sell orders are carried out in a shorter period of time), and more perks, but this is not always the case. That is why it is important to look around and compare brokerage firms before you open an account.

Minimum Opening Balance and Maintenance Fees

Each broker has a minimum opening balance requirement. Some are as low as $500, most are around $1,000, and several are higher. The general rule of thumb is you should have at least $1,000 when you go to open an account. Be careful though; some brokerage firms may have a low opening balance but will charge you a maintenance fee if your balance falls below a certain amount. Although the fee may be as little as five to fifteen dollars per quarter, it can significantly eat up your investment returns if you are just starting out (e.g., $60 per year in fees on $1,000 account balance is equal to 6% interest!)

Services, Perks, Research, and Investment Tools

No broker offers the exact same set of tools, research, and perks to their customers. Some will allow you to instantly log in to your account via the Internet and print out an analysis of your portfolio, view the balance of your account for the past six months, check your realized and unrealized gains, and view dividend records for the past few years. Others may be slim on features such as this, but offer amazing research that you can't get elsewhere. If execution time is important to you, check out the firm's policies. One online discount broker promises to execute your trade in 60 seconds or less, or you will not be charged a commission.
Lately, a lot of brokerages have begun offering Visa Check Cards which work exactly like a credit card. The difference is, the money you spend is taken directly out of your brokerage account. This way, you have the combined functionality of a checking / savings / money market account with a stocks / bonds investment account. It is tremendously convenient and can help simplify your finances. If you are looking for an all-in-one solution, an asset management account may be a more attractive alternative.

Online Availability - Interface and Ease Of Use

Before you open an account, you should fire up your favorite Internet browser and visit the web page of each of the brokerage firms you are considering. If you plan on doing a lot of your research or trading online, the feel of the site is going to be almost as important as the other benefits and services offered.