Your Easy Step-by-Step Guide to Opening an Investment Account

On this website, I have a lot of posts about investing. However, my posts usually center around investing for retirement. The reason is that relatively few people invest enough for retirement. Ideally, you should invest about 15% of your gross pay for retirement, which is a tall order for most of us. That being said, there is so much more to investing than just investing for retirement. For a variety of reasons, many people may want to open an investment account, also known as a brokerage account. However, the idea of opening an investment account can seem intimidating. That’s where this guide comes in. I break down the process so it’s hopefully much easier and less stressful.

Some Terminology Before We Start

A note on terminology. Stocks and equities are pretty much the same thing. There are some kinds of equities that are not stocks, but they’re rare and generally not available to regular people. So when you see the term “equity,” remember it basically means stocks.

ETFs, or exchange traded funds, are very similar to index funds. In both cases, they are bundles of investments that tend to be well-diversified. For example, there is an ETF and an index fund that are both based on the S&P500. Those ETFs/index funds are made up of the 500 largest companies in the U.S. They both tend to perform well and similarly over time. And they tend to have low fees because they are easy to manage. Nobody has to make a decision of which companies to include in the S&P500 ETF/index fund, they’re automatically updated as companies enter and leave.

ETFs are more tax-advantaged, however, and generally require a smaller initial investment. Many people prefer them for this reason.

Step 1. Consider What You Want from An Investment Account

For example, are you looking to invest just for fun or to learn more about financial markets? Do you want to grow your money, slowly, steadily, and safely? Are you interested in investing in riskier assets that have higher potential returns but also higher risks of downsides? Or perhaps you have a mix of reasons for wanting to open a brokerage account.

Make sure you are clear on your reasons and list them out if it is helpful.

Step 2. Assess Your Risk Tolerance

If you are investing a small amount of money and aren’t particularly nervous about risk, then you may be more willing to try out a higher-risk strategy. If you are investing a large amount of your money or if you are risk averse, you probably want to choose a safer strategy.

As you think about your risk tolerance, remember that safer strategies will tend to yield lower but more reliable returns. In other words, you trade off returns for safety. Riskier strategies have higher potential returns, but also a higher risk of losing money. In other words, you trade safety for potential returns.

Step 3. Combine Those Answers to Decide What You Want To Invest In

Knowing the answers to the above 2 questions will help you determine whether you should:

• Invest your money in individual companies. This strategy should largely be reserved for those who are looking to have fun with their investing and are okay with losing the money they invest. This is one of the riskiest strategies. The risk of this strategy can be slightly offset by investing in companies in a variety of industries, geographic locations, and sizes and by having extensive knowledge of the factors that make a company under- or over-valued on the stock market. But you’ll have to invest in a lot of companies to be very diversified.
• Invest in index funds or ETFs that tend to have moderate to high risk and higher potential reward. For example, these could include emerging market indices and indices based on small businesses (like the Russell 2000). Because these indices are relatively diversified but in a higher risk area, this strategy has a medium to high risk level.
• Invest in broad market index funds or ETFs. For example, these could be index funds or ETFs based on the S&P500. This is one of the safest, least risky equity investment strategies that will tend to yield relatively safe, reliable growth.
• Invest in fixed income assets like bonds, CDs, money market funds, or treasuries. Aside from keeping your money in a savings account, this will generally be the safest strategy, especially if you invest in Treasury Bonds or Bills that are backed by the US government. However, its level of safety comes with a cost: it will not return as much as stocks.

A Caveat About Including Crypto In Your Investment Account

The four options above will be the most compelling for most people. I haven’t mentioned things like cryptocurrency because that’s not really investing, that’s speculating. To be an investment, the thing you are putting money into has to create real value, like companies producing products or services. An Apple phone, for example, has use value.

Cryptocurrency does not produce value yet. Its value is based entirely on people’s interest in it. As such, cryptocurrency is only worth a lot when everyone else thinks it’s worth a lot. As a result, speculating in cryptocurrency is much riskier (and more like gambling) than expecting all the biggest companies in the US will continue to produce value.

Pay Attention to Fees!

Fees are also called expense ratios when applied to investments. You might see a fee of 1% on an investment, which sounds pretty good! A 1% fee means that for every $100 earned, the investment manager gets $1. But that’s actually a super bad deal. In fact, if you invested $10,000 a year over 30 years. You would make over $70,000 less during that time if your fees were 0.75% of your earnings compared to if they were 0.25%.

You want your fees (or expense ratio) to be below 0.20% for index funds and below 0.75% for actively managed funds (ideally you want it well below that). If you search the company you’re planning to open a brokerage account with and “list of stocks to buy,” you can usually find a website that lists all of their equity options and expense ratios. This, for example, is Vanguard’s ETF list.

Step 4. Figure Out How Much You Want to Invest in Your Investment Account

If you want to invest thousands of dollars, then you have a lot of options. However, if you have more like $500 or less to invest, you may want to look into a company that offers fractional shares. That means you don’t need to buy a whole share of Apple (which costs $195.85 a share right now) or a whole share of the Vanguard S&P500 ETF (which costs $419.73 as of this writing). You could instead buy a partial share of these investments with the money you do have.

You’ll also want to pay attention to if there is a minimum investment required. For example, Vanguard generally requires a $3,000 minimum investment for its index funds.

Step 5. Decide Which Company You Want to Open an Investment Account With

Next, you can decide which company you want to open a brokerage account with. You should pay attention to whether:

1. They offer fractional shares and do not have a minimum required investment, depending on your needs.
2. They offer the kinds of assets you want to buy.
3. Their website is relatively user-friendly.
4. Other customers are satisfied with their customer experience.
5. They offer the type of account you’re looking for. For example, if you’re looking to open a custodial brokerage account, do they offer those accounts and will their policies for those accounts work for you?
6. And potentially whether they offer any good promotions or whether you already have an account with that company, which may make applying for a brokerage account and transferring money easier.

With a little bit of research, you can find a company that’s a good fit. In the long run, your research will probably save you time because you will hopefully be less likely to get frustrated or dissatisfied and potentially have to change companies.

Step 6. Apply For a Brokerage Account

This is usually a pretty simple, painless process. However, the approval process does not happen immediately, so you may have to wait a little bit before you can start investing.

As part of this process, you’ll decide the type of account you want (like a custodial, Roth, or self-directed account). You also have the option to open an account that has a robo advisor. With a robo advisor, you input your risk tolerance and investment goals and they invest your money for you by using algorithms to determine appropriate investments. The fees are considerably lower than you would get with a human advisor. It’s an easy, low cost way of getting a personalized investment account.

For more info, you can check out this guide from Investing Bestie on robo advisors.

Step 7. Purchase Investments!

After your approval, you should hopefully have a good idea of what you want to invest in. You’ll transfer money into your brokerage account, and then invest that money.

You’ll want to know the ticker symbol of the investment you want to purchase. You can easily look these up online. For example, the Vanguard S&P500 ETF ticker symbol is VOO. You’ll input the ticker symbol into the portal and it will show you the amount a share costs and ask you how many shares you’d like to buy. You can then either:

1. Buy stocks immediately.
2. Only buy stocks if they lower to a specified price or better
3. Only buy stocks at the market close time.

A Few Tips

And that’s it! Now you’re invested! Of course, you may want to sell stocks at some point and that’s beyond the scope of this post (though maybe a Part 2 of this will come along soon). However, there are a couple of key tips to keep in mind on your investing journey:

• Mutual funds have higher fees than index funds and ETFs. Plus, mutual funds generally perform the same or worse as index funds and ETFs. As a result, certified financial planners no longer tend to recommend them and I don’t mention them here.
• The stock market goes up and down regularly. Expect downs. You’ll experience the most benefit from investing if you can invest long term, weather any declines, and let your money compound.
• Keep in mind that selling stocks leads to capital gains taxes and transaction costs. This is another reason it can be helpful to stay the course and not tamper with your investments too much.

To Sum Up

This may still sound intimidating. And if so, that’s okay! The best way to learn is to do, just like playing a board game for the first time. Remember that you can always open an investment account and then not put anything in it. Or close it! There is little risk in doing a little research and seeing if investing is right for you. But you have so much to gain by getting comfortable with investing and personal finance in general. I believe in you!

If you enjoyed this post, please consider liking, subscribing, or sharing, it’s always a big help! For related content, see my posts on getting started investing, investing for retirement, and why the stock market is less scary than you think.

Finally, remember that I am not a financial advisor. This information is purely for entertainment and educational purposes. Before making any financial decisions, speak to a financial advisor.