What to consider when opening your first brokerage account

This is a guest post from Dong, who writes about personal economy at Ask Dong.

Who can forget their first time? I certainly can't. I was 22 and fresh out of school. The NASDAQ was around 4000, and young turks like myself were getting jobs that we had no business holding. The times were good. Even if I couldn't work for a dot-com, there was no reason for me not to invest in them. The world was my oyster.

I opened my first real brokerage account with only one in thing in mind — I wanted the cheapest trades possible. At the time, Datek offered the best price at $9.99 a trade. This wasn't my first account, but it was my first account as an adult.

Important Factors

While my choice of Datek back in 1999 wasn't a bad one, I realize in hindsight that I didn't go about choosing a broker in a particularly systematic manner. Today, the options are more numerous, and the services provided more comprehensive, but there are still the same factors to keep in mind, including:

  • Cost: Trading costs, account maintenance costs.
  • Mutual fund selection: Number and variety of no-load mutual funds.
  • Investor research: Access to different analyst reports, robust graphing options.
  • Customer service: Are service representatives easily reachable and well-informed? Does it cost extra to talk to someone?
  • User interface: Easy to use?Easy to navigate?
  • Customer reports: Profits and losses are easy to discern. Reports are up to date.

How one weighs each of these factors is a matter of personal preference and need. In my view, there are basically four types of investors. I've listed them below and ranked in order the factors to consider, from most important to least important.

Completely Clueless Investors

A clueless individual isn't an investor per se, but rather someone who needs access to a lot of educational resources. Even if someone decides to be a relatively basic investor, and invest only in index funds, that someone should understand the decision to do so. I think it's great to follow a tried-and-true method of investing like using index funds exclusively. But to do so without any education is still foolish.

Important factors for new investors are: customer service, user interface, cost, investor research, mutual fund selection, customer reports.

Passive Index Fund Investors

This type of investor doesn't need much out his brokerage company — mainly free access to cheap index funds. Because someone who subscribes to the Bogle way of thought is all about reducing costs, index mutual fund trades must be free, but other trading costs might be irrelevant. Some of these investors may employ the use of ETFs (exchange-traded funds), and therefore would want low-cost stock trades. Other than investments made on a regular periodic schedule, which would likely be done via a free mutual fund, the overall level of trading on such an account should be minimal.

Index fund investors would rank the factors like this: mutual fund selection, customer service, cost, user interface, customer reports, investor research.

Value Investors

Value investors buy individuals stocks and mutuals funds, but are not active traders. They buy and hold, but not forever. Fundamental research is important, but fancy graphs and technical indicators are not. Reporting is important but trends are measured in quarters and years, not days. Trading costs are important but not as important as they would be for an active trader.

For value investors, the factors in choosing a brokerage are: cost, mutual fund selection, investor research, customer reports, user interface, customer service.

Active Traders

Active traders don't hold positions for extended periods. What's important to them is the ability to trade different products, and to do so cheaply. A good and easy-to-use interface is important. Also, reporting features, especially ones that measure daily performance, are important.

Active traders consider the following important: cost, user interface, investor research, customer reports, customer service, mutual fund selection.

Know Thyself

Like anything else, it's important to know thyself. Know what kind of investor you are and what kind of investor you might become. Opening a brokerage account isn't unlike investing; read what the experts have to say and still do your own research.

The options today are more numerous and varied than they were for me in 1999. Some brokerages, like Zecco, offer “free” trades for most small investors. Others, such as Bank of America and Wells Fargo, offer free trades for customers who do substantial business with the bank. However, as I've learned, trading costs aren't everything — knowing what you want and need is.

More about...Investing

Become A Money Boss And Join 15,000 Others

Subscribe to the GRS Insider (FREE) and we’ll give you a copy of the Money Boss Manifesto (also FREE)

Yes! Sign up and get your free gift
Become A Money Boss And Join 15,000 Others
guest
22 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
Mrs. Micah
Mrs. Micah
12 years ago

I’m opening an account with ING for various reasons, but as a passive and Boglehead type I plan to move my account to Vanguard when I have enough money. Might was well go to the source.

Steve S
Steve S
12 years ago

This article started out well, then it ended up just being an advertisement for Zecco.

What other options are out there (particularly for investing style #2)? I don’t want to do my own search and miss out on one of the better businesses.

John Forman
John Forman
12 years ago

The absolute #1 on this list should have been security of and immediate access to your funds. A lot of folks take that stuff for granted, but I’m sure there are some E-Trade customers out there sweating a little bit right now.

Lily
Lily
12 years ago

I think this article started out well and ended up well. It’s not exactly a “Rah Zecco!” if Dong’s just informing us of various options. Steve S – if you do your own search, you won’t miss out on one of the better businesses. As far as brokerages go, reputable ones will turn up on any cursory search. If you’re interested in passive index investing, find the funds you want to invest in first, and then open an account with that brokerage. For example, if you mainly want to invest in Vanguard funds, open an account with Vanguard. If you… Read more »

J.D.
J.D.
12 years ago

Hm. Steve has a point. Some of that cheerleading for Zecco is my fault. I put the actual ad in there. In retrospect, it’s not appropriate for the content. I’ll take it out.

Jayne
Jayne
12 years ago

This post comes at a perfect time. I opened my first brokerage account with Sharebuilder yesterday afternoon. I am the clueless investor you described: I’ve never had my money in anything but savings and checking. I’m still figuring out what all of the jargon means. I’m treating the whole thing as an educational experience; I’m just playing around with small sums right now, learning my way around the site, and going through all of their tutorials. I think that’s the best way to do it if you’re new to the game: don’t go for super fantastic returns or market timing… Read more »

Dong
Dong
12 years ago

When I wrote the post I didn’t really want to recommend specific brokerages even though it might come across that I’m recommending Zecco. I really do think it’s important for everyone to do their own research even if it’s done quickly. It would be hard for me to recommend brokerages given that I haven’t used them all. I’ve used Fidelity, Ameritrade, E*Trade, and OptionsXpress, and Vanguard (really just the mutual funds). Dabbled with Zecco, Citibank, and Bank of America – i.e. opened an account but never made a trade. For what it’s worth I like E*Trade the best as an… Read more »

Nick
Nick
12 years ago

Vanguard may not be an option for everyone. They have a minimum of $2500 to open an account. For someone just starting out, thats a lot of money to use in a learning experience.

MonkeyMonk
MonkeyMonk
12 years ago

What happens to someone’s investment account if your broker goes bankrupt?

Say you’ve invested in a +$200,000 portfolio of Vanguard mutal funds and dabbled in some invidual stocks and bonds through a third-party broker that goes under. Is your money safe since it’s (hopefully) safely invested in other companies or does it somehow get tied up in the bankruptcy proceedings?

Ryan S.
Ryan S.
12 years ago

For myself, when I opened my account, Firstrade was the cheapest option. I still have that account there and I’ve been quite happy with them; $6.95 stock trades, $9.95 mutual fund trades, and no minimums, no inactivity fees. I like them. 🙂

Ryan
http://uncommon-cents.net/

RacerX
RacerX
12 years ago

You make a great point that free isn’t always free. I don’t mind paying (a bit) for service and the ability to research. As a value investor I am painfully slow to look at all of the angles first.

Don
Don
12 years ago

Definitely know yourself. I opened my first brokerage account with Sharebuilder. I liked that you could buy partial shares inexpensively, and you could have your dividends reinvested for free. I found in practice however that I didn’t like the broad “Tuesday trading block.” For $4 you get a trade, but you have no idea during the day when it will occur. I always felt like they might be skimming off the price, whether that was rational or not. And sells were expensive, although they have come down with the ING deal. I opened a new brokerage account with Firstrade recently… Read more »

Money Blue Book
Money Blue Book
12 years ago

Having the lowest fees possible definitely isn’t everything. I highly value customer service, website functionality, aesthetics, and stability (no impending bankruptcy rumors). Good tips Dong
-Raymond

Wayne Mulligan
Wayne Mulligan
12 years ago

Great article – I like how you break out the framework by investing style. I’d really LOVE to see a follow up article where you talk about how to select an offline broker/money manager. I was a “cold calling” broker myself in a former life and I know a lot of folks could use some help in differentiating between the good guys and the bad guys – applying the “investing style” to that type of decision could be very helpful as well.

Again, great article.

adfecto
adfecto
12 years ago

I started with Charles Schwab because of their friendliness to those with small initial investments. All it took was $100 to open the account and $100 per month investments. There may be other brokers that run a similar deal but not many. Oh, the stock purchase fees are competitive and there is a long list of no-load mutual funds. I did not intend this to be an advertisement but I’ve been happy with my experience thus far. I plan to move my money to Vanguard once I have the $25k I need to hold a diversified mix of index funds,… Read more »

Mira
Mira
12 years ago

Great article and right on time. I’m getting ready to get into that part of investing. Like Jayne above, I’ve never had my money in anything else but savings and checking accounts.

This article and the feed back gives me a good resource. Hopefully, there’ll be more articles and discussions for New Investors such as myself. I’d be interested to learn more about the ongoing experiences of other investors as we get our feet wet in the investing world.

Writer's Coin
Writer's Coin
12 years ago

For Passive Index Fund investors Vanguard is best place. Why not invest in index funds where they were invented?

They cost, on average, around .22% and they have all the options you could want.

Finance Monk
Finance Monk
12 years ago

To my similarly-named monastic friend who said: —- MoneyMonk said: “What happens to someone’s investment account if your broker goes bankrupt? Say you’ve invested in a +$200,000 portfolio of Vanguard mutal funds and dabbled in some invidual stocks and bonds through a third-party broker that goes under. Is your money safe since it’s (hopefully) safely invested in other companies or does it somehow get tied up in the bankruptcy proceedings?” —- That’s a very solid concern. Brokerage accounts are not covered under FDIC. However, your principal is theoretically recovered by the government under a similar organization called the SIPC(Securities Investor… Read more »

Finance Monk
Finance Monk
12 years ago

Oh, and as for my brokerage, I chose Schwab recently, mainly due to their easily accessible high-interest checking account. They’re not mentioned as often in the blogging world as say, HSBC, ING or Provident because of a slightly lower %APR and slightly higher transaction fee (4.0% and $12.95/trade currently ) but they’ve got a fantastic website set-up and fit my needs quite well; I only do a few trades a year by collecting in the high-interest checking and then purchasing diversified ETFs.

BxCapricorn
BxCapricorn
12 years ago

http://online.wsj.com/public/resources/documents/barronsbroker-final2.pdf
Link to Barron’s 2007 Single Sheet PDF rundown of brokers. Very useful.

Jeremy
Jeremy
12 years ago

Active traders care very much about trade execution quality, and quality of the data feeds, neither of which are mentioned in this article.

Phil A.
Phil A.
12 years ago

Stick with mutual funds because of the diversification factor. Investing in individual stocks is a bit riskier and can be quite costly. ETFs aren’t a bad option because they mimic indices which provide diversification. They do trade like stocks so you still have the cost issue to keep in mind when trading.

shares