Everything You Need to Know to Open a Brokerage Account


There are a few things every man needs. A suit that fits perfectly. A celebratory toast you can adapt to any occasion. A good pair of sunglasses. And a brokerage account.

If that last one sounds jarring, read on. For starters, a brokerage account is simply a portal for buying stocks, bonds, mutual funds, and other investments. But with interest rates near all-time lows and stocks near all-time highs, there has never been a better time to get your own slice of the capitalist pie. (And let’s face it: Your new interface with Wall Street will boost your wealth and make far better use of your screen time than Call of Duty ever will.) But there is one caveat: A brokerage account is of little use if you’re broke. So I’m hoping that when you subtract your annual expenses from your income, you get at least a four-digit number. If nothing else, maybe the occasional bonus or extra commission rolls in? A check from your great aunt? Before it gets sucked into the how-much-did-I-spend-last-night? slush fund, divert that extra cash into your new account. By making sensible investments in stocks, bonds, and other assets, you can build your savings over time in a way that’s not possible at a traditional bank.

Let’s say you park your cash in a bank savings account. You will literally lose money over time, thanks to inflation. Savings accounts are paying the lowest levels of interest in our lifetime: The national average is 0.09%, which is the mathematical equivalent of “nothing.” Put $1,000 in the bank at that rate, wait 20 years, and you’ll earn $18—which by then won’t even be enough to buy a Big Mac and fries.

A brokerage account, meanwhile, is like a 401(k) but better: You can invest the money however you want and take it out whenever you want, and you’ll pay taxes when you sell for a gain (and take a deduction when you sell for a loss). But there’s no company matching, so make sure you fund your work account first to get that free money.

And the mere act of opening a brokerage account will likely make you richer. The reason why is simple: If you have the account, you’ll fund it. And once you’ve attached the mental label of “investment” to that cash, you’ll be less likely to spend it. In a world with endless tricks for separating you from your Benjamins, this is a great way to pay yourself first. After all, we’re accustomed to funding our daily lives with our bank account, but dipping into investments requires extra steps, and that’s a good thing. After all, how many times have you regretted not making a purchase? 

With that in mind, here’s your step-by-step guide to becoming the next Warren Buffett.

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You have to start somewhere—so do it

Once you’ve got your money set aside, where do you begin? Well, the same firm that handles your retirement account at the office probably offers a brokerage account—Fidelity, Schwab, and Vanguard are all good options. I’m partial to Fidelity’s website, which is easy to navigate yet has lots of in-depth information, from detailed accounting of your returns to wonky-stock research. 

There are dozens of notable smaller outfits, too, like Kapitall, which lets you trade pretend money for practice. In fact, I recommend you use only pretend money when trading stocks—think of it as Call of Duty for grown-ups—because when real cash is on the line, you’re better off sticking with low-cost index funds that you hold for the long term. That way, you can build a portfolio of most of the stocks in the world for less than your grandfather would have paid to trade a few shares of General Motors. More on that below.

Keep your brokerage account separate from your banking account

Or, better yet, streamline all your money matters by dumping your bank and just keeping all your cash at the brokerage. Schwab and Fidelity, for example, offer no-fee banking, refund ATM fees from any bank machine, and allow you to write checks and pay bills online. And Fidelity offers a credit card that will refund up to 2% of purchases into your brokerage account. This way you’ll need only one password and your whole financial picture fits in one frame. Transferring money is a breeze, enabling you to invest in (slightly) higher-paying funds until you need the money.

Understand the profound importance of diversifying your investments

Let’s make one thing clear: Unlike an FDIC-insured bank account, investments in stocks and bonds can decline in value. So I’m not suggesting you throw money into stocks blindly, assuming that the bull market will charge on indefinitely. But since a bank savings account is a guaranteed way to lose purchasing power slowly over time, it makes sense to diversify into investments that, historically, have yielded much higher returns over the long term. (Even investors who had the horrible timing to buy U.S. stocks the day they peaked before the Great Recession have recouped all their losses and earned another 60%.)

For starters, don’t buy stocks with money you might need in the next few years. And, as previously stated, choose low-cost index funds that hold the entire market. For example, the Vanguard Total Stock Market Index fund will give you exposure to virtually all the stocks in the U.S. You’ll also want to own foreign stocks, which have not rebounded as dramatically from the financial crisis as domestic shares but might do better over the coming years. 

Traditionally, bonds have served as the income producers and shock absorbers for investors. But with rates at all-time lows, the income is measly, the shock absorption is a bit thin, and the possibility of losses seems high. Still, financial adviser Gary Schatsky recommends investing in the Vanguard Short-Term Investment-Grade Fund, which is paying around 1.7% and should not get hit too hard if rates rise. And if you’re a resident of a high-tax city or state, you might also consider a municipal-bond fund, as the interest on in-state bonds is tax-free—the higher your taxes, the bigger the benefit. 

Finally, to take another step out on the exotic-investment curve, consider closed-end bond funds, which borrow money to boost returns and right now are selling at an unusually high discount to the underlying holdings. History suggests that the discount will eventually shrink, benefiting those who bought cheap.

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Just in case I haven’t been 100% clear, let me just say it

Stock trading is a loser’s game. Piles of academic research show that buy-and-hold indexers outperform most other market participants. Maybe the best endorsement comes from Warren Buffett, who recommended that 90% of his wife’s inheritance be invested in a simple index of U.S. stocks. That said, yielding to little temptations is sometimes the best way to keep yourself on the right path. So if you can’t resist chasing that hot stock tip, go ahead—just don’t commit more than a small percentage of your portfolio. If it doesn’t pan out, your losses will be manageable. And if it does, enjoy your gains. Just don’t mistake luck for skill.

Take the master class 

A lot of guys thought they were geniuses when they were doubling their money every year in tech stocks in the late ’90s. Investing was easy—until it wasn’t, and they got wiped out. So if you do get bitten by the investing bug, put in the training time before you put your money at risk. The best book ever written on investing is The Intelligent Investor, by Benjamin Graham, who was Buffett’s mentor. Buy the edition edited by Wall Street Journal columnist Jason Zweig; if you study hard enough and learn to rein in your emotions, you may just be able to outsmart Wall Street. If mastering Graham’s approach to investing is too daunting, however, stick to index funds. You’ll still come out ahead of most investors—and you’ll have a lot more free time. 

Jack Otter is the author of Worth It…Not Worth It? Simple & Profitable Answers to Life’s Tough Financial Questions.

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