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How to Open an Online Brokerage Account

Discover how to open a brokerage account and start investing for your future. Opening an online brokerage account…
How To Open An Online Brokerage Account

Discover how to open a brokerage account and start investing for your future.

Opening an online brokerage account is similar to opening a bank account – you sign up and add money. But there’s a big difference: a brokerage account lets you start trading and investing your money. When opening a brokerage account, it’s important to consider the risks and how to manage them.

Creating an online brokerage account is quick, but choosing the right broker is essential. Before investing their hard-earned cash, new investors should learn to reduce the risk of losing money in the markets.

Steps Required to Open an Online Brokerage Account

Investors should decide whether to open a brokerage account for more than retirement savings like an IRA or 401(k). While retirement savings are important, some people may want to open a brokerage account to earn extra money through capital gains on investments.

If you decide to invest more money, the first thing to do is open a margin account (which lets you borrow money) or a cash account (which only allows you to invest what you have). Once you’ve made this decision, your next steps include:

  • Assess how a brokerage can assist in risk management.
  • Pick a brokerage firm.
  • Submit an account application.
  • Deposit money into the account after it’s approved.
  • Practice thoroughly before purchasing any stocks.

Step 1: Decide How You Will Use Your Brokerage Account

The main decision is to use a margin or cash account for your investing choices. With a margin account, you can buy more stock shares than a cash account because it allows you to borrow money for investments.

Using a margin account means earning profits from extra shares if the stock price increases. However, if the stock price falls, you could face bigger losses.

For instance, let’s say you buy all available shares of stock XYZ in your margin account. You’ll have twice as many shares as you could in a cash account, so any changes in the stock price will have double the impact on your account balance. If XYZ’s price drops by 10%, your trading account’s value will drop by 20%.

Conversely, a 10% increase in XYZ’s value would result in a 20% gain. A cash account is better for investors who prefer less volatility in their trading results.

Step 2: Evaluate How the Brokerage Can Help You Reduce Risk

There are many brokerages where you can open an online account to buy and sell U.S. stocks and other investments. Investopedia’s staff has reviewed the most popular ones because each brokerage offers services differently.

Some brokerages focus on simplicity and ease of use, while others help investors with research and analysis. Investors must research companies, decide on their investment strategy, and place orders without mistakes.

Brokers vary in their research tools, like charts and news databases. Some also offer educational resources to help investors understand the tools better. The more trades you make, the more important research tools become.

Regardless of the tools available, the platform should be easy to use to avoid making accidental trades. Here are some other things to consider for account holders.

  • Brokerage account minimums: Several brokers let you start an account with $1,000 or less; some even let you open one without any initial deposit (although they might close it if you don’t add funds after a few months). Other brokers may need $5,000 or more to open an account but often provide more services on their platforms.
  • Account fees: In recent years, the online brokerage industry has faced strong competition, leading to the elimination of trading commissions on stocks. While some fees still exist, trading stocks through an online brokerage account has become much cheaper.
  • Account features: For most investors, important features include tools for picking stocks and analyzing performance. Some may need the option to trade fractional shares, while others want access to robo-advisor services. Investor education and beginner-friendly services are also crucial, but these can differ greatly between brokerages.
  • Investment options: “In the U.S., most brokerages allow trading U.S. stocks and ETFs, but they may have restrictions. Some don’t offer trading for over-the-counter stocks. Each brokerage varies in its investments, like mutual funds, bonds, global stocks, options, futures, forex, and cryptocurrencies. Investors need to check each brokerage to ensure they can invest in the securities they prefer.”

Step 3: Choose the Best Online Brokerage Account

After checking and comparing different brokerages with the features you need, choose the one that suits you best and is easiest to use for your goals. Factors like additional investing platforms or international rules might also affect your decision. Make sure to think about any transfer requirements related to where you live or your situation.

Best Online Brokerage Accounts

CompanyAccount MinimumFees and Commissions
Fidelity$0“Stock and ETF trades are free, while options trade cost $0 plus $0.65 per contract.”
Interactive Brokers$0 $0 commissions for equities/ETFs available on IBKR’s TWS Light, or low costs scaled by volume for active traders that want access to advanced functionality such as order routing. $0.65 per contract for options on TWS Light; that is also the base rate for TWS Pro users, with scaled rates based on volume. $0.85 per contract for futures.
tastytrade$0$0 stock trades, $1 to open options trades (capped at $10 per leg), $0 to close

Step 4: Start the Application Process

“When you sign up for a brokerage account, you’ll give the broker basic details like your ID, taxes, and income. The Securities and Exchange Commission (SEC) sets rules for this, called ‘know your client’ (KYC) standards. Newer brokers might simplify this process, but it won’t take too long, usually around 30 minutes at most. You might need to share tax numbers or a copy of your ID.”

Step 5: Fund Your Account

“After you apply, a customer service agent will check your application, usually approving it within a few hours. Sometimes, it might take longer, especially during busy times or holidays.

Once approved, you can move money from your bank to your brokerage account. You must provide your bank’s name, routing number, and account number. If you’re uncomfortable doing this online, you can use a wire transfer, but there’s a fee.

Depending on how you transfer the money, it might take 24 hours to a week to show up in your brokerage account. Even though you can use this money immediately, it’s wise to practice investing before doing it for real.”

Step 6: Simulate Your Trading Before Going Live

Investing might seem easy, but it takes a lot of discipline. You buy low and sell high, but it’s not always that simple. You can make many tricky parts and mistakes, but you can learn by trying things out.

If you’re worried about losing money, you can practice virtual trading. Lots of brokers offer simulated trading accounts. If your broker doesn’t have one, you can use Investopedia’s Simulator to learn how to make orders, watch your investments, adjust them, and close them. It’s a great way to learn without risking real money.

Requirements for Opening an Online Brokerage Account

When you apply for an online brokerage account, ensure you have some basic info. If you’re not a citizen of the country where you’re opening the account, you might need extra documents and face more rules.

Personal Information 

  • Full name as recognized by the law
  • Where do you currently live
  • Your Social Security number or another tax ID number
  • Your previous experience with stocks, options, futures, or forex
  • Information about your citizenship status, if it applies
  • Details about your military service, if relevant

Banking Information 

  • The name(s) linked to the bank account
  • Type of account
  • Name of your bank
  • Bank routing number
  • Your bank account number

Keep in mind that details may differ for other transfer methods.

The Bottom Line

Online brokerage accounts have greatly improved and are now more powerful and cheaper. Opening an account is faster, sometimes taking just 15 minutes, and you can add money to it in a day. But before you open one, research what features you need. Opening an account isn’t enough; you must know how to use it to invest online.


1. What Are the Three Types of Brokerage Accounts?

Ans: There are three kinds of online brokerage accounts for customers to pick from:

  • Cash accounts: You cannot borrow money after each trade; you might have to wait three days before using the money again. Plus, certain types of assets are restricted.
  • Margin accounts: Investors can borrow money at a ratio of 2:1, which means they can buy twice as many shares as usual. They pay interest on any borrowed amount more than their account balance. Plus, they can settle trades on the same day.
  • Tax-advantaged accounts are special accounts like IRAs and 401(k)s that offer tax benefits. You can put money in them but might face penalties if you take it out before a certain age. While the money stays in the account, it can grow without tax.

2. Do You Pay Taxes on Brokerage Accounts?

Ans: Cash and margin account users pay taxes on their gains depending on how long they’ve held their investments. If they’ve held them for over a year, they pay taxes at a lower rate called the long-term capital gains rate. Retirement accounts, on the other hand, don’t get taxed until money is taken out.

3. Can You Withdraw Money From a Brokerage Account?

Ans: Yes, you can withdraw money whenever you want. However, there might be fees, and if you withdraw money from an IRA, you’ll have to pay taxes.

4. What Are the Risks of an Online Brokerage?

Ans: Opening an online brokerage account is simple, and you can start trading quickly. But you might lose some or all of your money if you don’t understand the risks.

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