Before you can start buying stocks, you need to open a brokerage account. For some, that concept may sound foreign or complex – but it’s not and today I am going to discuss how to get started. There are two core ways to invest your money: self-directed or managed. When I say self-directed, I mean that you have 100% control over your brokerage account. You choose the stocks/bonds/etc. to invest in yourself. Managed money is when you have a professional broker or robo-advisor choose your investments for you. Your investment portfolio becomes hands-off. We’ll talk about managed money and robo-advisors more in a future article.
As you may remember, in my stock valuation article I opened up by saying that most people should not be investing their own money. But if you take the time to learn how to invest and the time to research investments, managing your own investments may save you fees and even earn you greater returns. This article is going to focus on self-directed investors and how you should get started to find a good online brokerage.
There are two main considerations when choosing a brokerage and those are cost and features.
Self-directed brokerages generally make money by charging commissions. Commissions can be a flat fee per trade or a percentage of the value of each trade. Remember, that when you buy a stock, you will generally eventually sell that stock. So the commission is often charged twice. Be very wary of commissions. If you are engaged in short-term trading, which I do not recommend, the commissions can quickly eat into any profits you make – or add to your losses.
Brokerage features may include the potential to invest in additional asset classes such as mutual funds or options. They may also include access to advanced stock researching or trading tools. With features, I return to the phrase of know thyself. If you are just starting out, trading complex asset classes such as options is probably not something you need right now. If you do need it in the future, you can always change brokerages or open a second account. Additionally, some of the featured trading platforms are specifically built for day traders (someone who buys and sells the same stock within the same day). If you’re not a day trader, again, you probably do not need this. What can be helpful for average investors, though, is access to stock research platforms. But in today’s age, there is wide-ranging free access to stock information. Personally, I do not use any advanced stock research platforms that are not free. But for some, these platforms can make analyzing stocks easier and provide access to otherwise unavailable information.
As far as the process of starting a brokerage account, it couldn’t be easier today. It can all be done online and should take less than a half-hour. Just like opening a bank account, you have to provide all of your personal information. You should also connect your brokerage account with your bank account so that you can make quick, free transfers of money between your bank and brokerage accounts. Depending on the brokerage you choose, there may be a short wait to get approved. More frequently, though, approval is nearly instantaneous.
So now that we’ve covered the basics of online brokerage accounts, let’s go through a few options. Personally I use two brokerages: TradeKing and Robinhood. I am going to give a quick review of my experience on the those two and then mention some other options that are out there.
TradeKing is the first brokerage I opened an account with. What attracted me is that every trade costs a flat $5 commission (technically $4.95). This is pretty low in the industry and it also seemed nice that it was not percentage-based. What I learned, though, is that flat-dollar commissions can be very costly if you are not investing a lot of money. In other words, if you buy $100 of a stock, the $5 commission is essentially 5%. But you also have to pay it again when you sell. So that means your stock has to appreciate in value by more than 10% to make a profit. That’s a lot. However, if you buy $2,000 of a stock, the $5 represents a much more reasonable .25%. and your stock only needs to appreciate in value by .5% to make a profit. That seems much more reasonable. The other consideration with this is that if you invest $2,000, but split among 20 different stocks – you will be in the same boat as the person investing just $100 in one stock. That is because the commission gets charged per individual stock instead of how much you are investing overall. You sort of get penalized for diversification in that sense.
In general, I would recommend holding a minimum of 7 individual stocks and paying no more than an effective .5% commission (remembering that the .5% will be charged twice for a total of 1%). That means you have to invest a minimum of $7,000 (7 stocks at $1,000) with TradeKing for it to meet my criteria. If you are investing less than that, I simply would not recommend TradeKing. You can’t afford special features when you are investing less than $7,000. As a note, trading non-stock asset classes has different commissions with TradeKing. You can see a full run-down of TradeKing’s fees here.
Now let’s talk about those features. First of all, TradeKing lets you invest in almost every standard asset class. You can invest in mutual funds, which I do not generally recommend over ETFs (Electronically Traded Funds), and options, which are risky and complex to understand for beginning investors. That said, I have invested in both mutual funds and options in the past. With options, I have particularly had some fun. It is nice to have these asset classes available to invest in if I want. That’s the primary reason I still have my TradeKing account.
In addition, TradeKing does offer a seemingly nice day trading platform – but I haven’t tried it out yet. There are also several stock research tools. I have used the stock screeners in the past, but ultimately I rarely use TradeKing’s research features.
Overall, if you are investing more than $1,000 per stock and think you really need TradeKing’s features, this is one of the cheapest options in the industry. I have had an overall positive experience. That said, since I do not regularly use the features, I later opened up a brokerage account with Robinhood and have slowly been moving my assets out of TradeKing and into Robinhood.
Robinhood is the new kid on the block when it comes to brokerages. They offer something no other brokerage ever has: no commissions! *cue confetti* Although it sounds too good to be true, I have been using Robinhood for about a year now and it’s true – absolutely zero commissions (except tiny federal government commissions). Robinhood, instead, makes money in two ways:
1. If you have a margin account (you are trading stocks on credit provided by Robinhood), Robinhood charges interest. Never buy stocks on margin.
2. If you have money in your Robinhood account that is not invested, Robinhood invests that money for itself to earn interest on it just like a bank. The uninvested cash, of course, is still yours and available to be invested or withdrawn at any time.
Because trading on Robinhood is completely free, it is perfect for beginning investors or really any investor. You are not penalized for investing small amounts or diversification. The only loss is that Robinhood is more of a bare-bones offering when it comes to features. You cannot trade using a website; it is all done on an app. You do not have the ability to invest in all asset classes and you do not have access to any advanced stock research or trading platforms. In my opinion though, those features are largely unnecessary for most investors. Because you can’t beat free, I strongly recommend Robinhood. Check it out for yourself.
Besides TradeKing and Robinhood, there are several other online brokerages out there (although likely none that are as cheap). Some websites offer pretty good comparisons between brokerages:
I’ve included a screenshot from StockTrader that overviews several brokerages:
That’s pretty much it! Opening a brokerage account is easy today and there’s no excuse to put it off. Have other questions on brokerages? Let me know in the comments. I’ll do my best to answer any questions you may have. Happy Tuesday!
Disclosure: I am not a financial advisor. Do not make any investing decision solely based upon what you read here. It’s your money, invest it wisely.