Sunday, May 27, 2007

How to Open a Brokerage Account/Different Types of Accounts

Well, now that I've already written about why you should invest, it's time to learn about how to open up an investment account. There are a few types of different investment accounts, the ins and out of which I'll explain soon. But there are also many different brokerages that you can use too. A brokerage is a fancy word for a bank that allows you to buy stocks and mutual funds.

A brokerage can also be 'full-service' or a 'discount brokerage'. The difference is basically that a full-service brokerage has investment advisors/stock brokers who you can call ask to pick and actually buy stocks for you; a discount brokerage has a customer service hotline, but you can't really call anyone and ask for investment advice or to buy an investment by talking with a real person. You buy the investments yourself using your computer. And of course, the commission or the fee paid for talking with a person on the phone is more expensive than just buying a stock online.

The lowest commission paid for a trade - the buying or selling of a stock or mutual find - is $7, and it's at a brokerage called Scottrade. But here's a link to the Motley Fool's Broker Center to help you choose which brokerage is right for you.

If you choose to open an account, I recommend Scottrade. They have the lowest commissions, great customer service, low account minimums and are really helpful at tax time. To open an account, just go to and click on 'Apply Now'.

Now for a brief rundown of the types of accounts one can open.

Individual Investment Account: This account is not a retirement account. It is an account, just like your savings or checking account, that allows you to buy stocks, bonds, mutual funds, and certificates of deposit. You can withdraw the money in this account at any time, but if you make money on a stock and sell it in less than a year, you have to give 20% of your profits to the government. If you make money on a stock and hold it for a year or more, when you sell, you only have to pay 15% of your profits to the government. These are called, respectively, short-term and long-term capital gains taxes.

Roth IRA: This is a retirement account and it stands for Roth Individual Retirement Account. Senator William Roth sponsored this account in the Senate and it allows people who meet certain income requirements (for single people, the maximum amount you can make and still contribute to a Roth is $96,000 and it's $150,000 for married couples) to save $4,000 a year in this account. The contribution goes up progressively with inflation and the passage of time. (In 2008, the contribution limit will be $5,000.)

You can withdraw your contribution money ($4,000) at any time without tax consequences. However, if you withdraws gains on that contribution money before 59 yrs. of age, you pay the same taxes that you would pay on gains in an individual investment account. So, let's say you contribute $4,000, and have a great year and make 25% on your money, netting you $1,000. You can withdraw the $4,000 you put in, but if you withdraw more than that, you get taxed at 15% or 20%, depending on how long you've held the investment.

Also, you can use this account to pay for higher education expenses or up to $10,000 (whether from gains or contributions) to put a downpayment on your first home, provided the account has been open for at least five years.

Please contact me if anything here has been unclear and you want to know more. As always, thanks for reading too.

1 comment:

Rachel said...


I may sound dumb, but what's the difference between stocks, bonds, mutual funds, and CD's?