Investing 101: How to open a brokerage account

In the final Investing 101 article, I will show you how to open a brokerage account so you can actually start investing. Knowing about index funds doesn’t do you any good unless you take action!

Don’t let this final hurdle stand in your way. Opening a brokerage account takes less time than you might think, and the steps are simple, with only minor variations depending on which brokerage provider you choose. These are the steps:

Choose a brokerage.
Open a brokerage account.
Link a bank account to your brokerage account to transfer money.
Set your core position.
Invest.
Set up dividend reinvestment.
Set up automatic investments.

Choose a brokerage

In the same way that a bank account allows you access to banking services, a brokerage account allows you to participate in the market for stocks and bonds. Some banks also offer brokerage services, and some brokerages also offer banking services, so the distinction can be a little blurry. Well-known brokerages include Vanguard, Fidelity, Charles Schwab, and TD Ameritrade. Some brokerages offer only brokerage services (i.e., the ability to trade stocks and ETFs), but do not have in-house funds to invest in. Other brokerages (such as Vanguard) offer brokerage services as well as a selection of in-house products, such as mutual funds, index funds, or ETFs that you can invest in.

Stocks and most ETFs are brokerage-agnostic, meaning that your choice of brokerage doesn’t matter. Many mutual funds and index funds, however, are in-house products specific to a brokerage. For example, the Vanguard Total Stock Market Index fund (VTSAX) is an index fund offered by Vanguard. If this is what you want to invest in, it is best to do so with a Vanguard brokerage account, as there are no transaction fees. Other brokerages might not allow you to purchase VTSAX, and those that do might charge you an additional transaction fee. For example, if you wanted to invest in VTSAX through a Fidelity account, Fidelity charges a $75 transaction fee. However, Fidelity has its own total stock market index fund (FSKAX) that is essentially the same product, which has no transactions fees for Fidelity customers.

I can’t tell you which brokerage you should use, but I do have an article comparing three of the most popular brokerages, Vanguard, Fidelity, and Charles Schwab (spoiler: it doesn’t really matter). I also have a review of Robinhood, in case you are tempted to use it as your main brokerage platform. As a disclaimer, I personally have Vanguard, Fidelity, TD Ameritrade, and Robinhood accounts. and I have no financial relationship with any brokerage institution apart from being a customer myself.

Open a brokerage account

Once you have decided which brokerage you want to use, it’s time to open an account with that brokerage. Opening a brokerage account is extremely easy and can be done entirely online. Simply go to the brokerage you selected, and find the “open new account” option. Most brokerages offer a wide variety of account types including retirement accounts, but for general, personal investing outside of employer retirement accounts, the type of account to open is simply a “brokerage account”.

The pictures in this article will demonstrate this process through Fidelity. Again, this is not an endorsement of Fidelity, but just a visual illustration of the process. However, as of the time of this writing (10/28/21), Fidelity is running a promotion where you can get $100 when you open a new qualifying Fidelity account. I don’t know how long this offer will last. Other brokerages may also run similar offers every once in awhile.

Next, you’ll need to provide a fair amount of personal information, generally known as KYC. This includes verifying your name, address, citizenship status, social security number, etc., for tax and anti-money laundering reasons.

Finally, the brokerage may ask about things such as your investment goals in order to recommend various investment products or advisory services to you. It’s up to you whether you want to use any of these services.

Link your bank account to your brokerage account

Once your account is created, you’ll be asked to link a bank account and possibly set a core position (see next step). Many brokerages may have a default core position that you cannot change.

This step allows you to transfer money to and from your bank account and your brokerage account. In order to invest, you must link at least one bank account, and transfer in some money to get started! Keep in mind that when you link a new bank account to your brokerage account, there may be additional steps needed to verify that you are the legitimate owner of the bank account. It may also take a couple of days for electronic fund transfers to be available for trading.

Set your core position

This may not be an option, depending on your brokerage. Your core position refers to the default position for any un-invested money in your brokerage account. In other words, where does the brokerage keep your money by default? For most brokerages, this will be a money market fund which earns negligible amounts of interest, but provides immediate liquidity for when you want to withdraw it or invest it. Some brokerages may offer you different options on how your un-invested money is stored. When you transfer money to your brokerage, it will default to your core position until you decide what to invest it in. From your core position, you can buy the assets you want, and the cost is deducted from your core position. If you sell any of those assets, the proceeds will go back to your core position. Money in your core position can also be transferred back to your bank account.

Fidelity does offer the ability to change core position.

Your core position is not an investment in and of itself! I see many people make this mistake and believe that just because they’re transferring money into their Vanguard or Fidelity account, that their money is being invested. Instead, their money is just sitting in a money market fund gaining negligible amounts of interest. Think of the core position as being equivalent to cash. Money in the core position won’t grow in any meaningful way! You must take the money from your core position to buy assets, whether they be stocks, bonds, ETFs, or mutual funds. The main purpose of the core position is liquidity.

Invest

Once you have transferred money into your account, you are ready to invest! There will be an option in your brokerage interface that says “Trade” or something similar. Enter in what type of asset you want to buy (stocks, mutual funds, bonds, etc.), the ticker name, the amount (either in dollar amount or the number of shares, depending on what you’re buying), and the type of order, and off you go!

Unless you’re using margin (borrowing money from your brokerage - not recommended for beginners), you must have enough money in your core position to cover the cost of your purchase.

Fidelity’s broswer trading menu for mutual funds. This is what it would look like if I wanted to buy FSKAX. Note that “NTF” here stands for no transaction fee. Other brokerages may look slightly different.

Logistically, there are some differences in the trade order depending on what you are buying. Stocks and ETFs trade during active market hours, and the price per share can fluctuate during the day. There are several different ways to place an order, including market, limit, stop limit, etc. Therefore, it is possible to “day-trade” stocks and ETFs. It is also possible to use more advanced trading strategies on stocks and ETFs, such as conditional orders and options.

All of this may seem overwhelming at first, but it really isn’t. The reason that so many people, including prominent investors such as Warren Buffet, recommend index funds is that you can avoid all this complexity and still invest in the market. Mutual funds (including index funds such as the aforementioned VTSAX or FSKAX) do not trade during active market hours. Instead, the share price (called NAV, or net asset value) is calculated after market close, and then your trade will execute at NAV. The only inputs required are the fund’s ticker symbol and how much you want to buy.

Nobody can tell you what to invest in, but you can review a previous Investing 101 article on asset allocation to get some ideas. A classic three fund portfolio described in that article and elsewhere on the internet can be done at just about any brokerage, and is a great starting point for beginners. As I’ve mentioned in many places on my site, I recommend passive index investing for most people, because it does not require any real expertise, market knowledge, or market timing. Passive index investing is also extremely cheap and accessible. More of your money gets to grow and compound, and you’re not paying hefty expenses or commissions to a financial advisor or fund manager.

Set up dividend reinvestment

Many stocks, mutual funds, index funds, and ETFs, as well as all bonds and bond funds, pay dividends. Funds may also pay capital gains occasionally. Dividends are profits from the companies that you’ve invested in, passed down as payment to you, the shareholder. Every brokerage will have a setting where you can choose what to do with your dividends.

Make sure dividends and capital gains are set to reinvest!

For long-term growth, by far the best way to handle dividends is to set them to automatically reinvest into the original asset. This means that you are using your profits to buy even more shares of the profitable asset, so that you can get even more dividends in the future. Over the past 100 years, the S&P averages “only” about 6.5% annualized returns without dividend reinvestment, but about 10% annualized returns with dividend reinvestment! And assets such as bond funds and REITs may not see much capital appreciation at all, instead relying on dividends for the majority of their returns. Depending on the specific investment and time period, dividend reinvestment can account for more than half of the total growth of a portfolio!

Set up automatic investments

Most brokerages will also allow you to set up automatic transfers and automatic investments. This is a great way to transfer a portion of every paycheck directly into your brokerage account, and automatically invest that money into funds that you want. Automatic investments promotes consistent wealth-building, removes emotion from investing, and reduces the temptation for frivolous spending. Even a small amount of automatic investments done consistently can build a tremendous amount of wealth over time, thanks to the power of compounding.

Automatic investments into 4 index funds, occurring on the 1st of every month, set up in Fidelity.

This concept is sometimes known as “pay yourself first”. Before you start spending your paycheck, you need to pay yourself first to build your financial future. Making automatic investments on every paycheck is one of the easiest ways for people to reduce frivolous spending, avoid getting caught up in the ups and downs of the stock market, and build wealth passively. If done consistently over decades, you will be astounded by how much wealth you can accumulate.

Conclusion

Well, this concludes the Investing 101 series. There’s a lot that I didn’t cover, even in the realm of passive investing, such as early retirement planning, tax considerations with investing, and rebalancing your portfolio. While those are important considerations, a young investor with a multi-decade time horizon could honestly “set it and forget it” at this point, and in all likelihood, amass a fortune.

Of course, there’s much more to the world of investing, especially active investing and trading. Any particular article, or series of articles, can only scratch the surface. There’s also plenty more investing information and advice out there. But knowing more doesn’t necessarily give you any better results, as it is all too easy to get caught up in the latest meme stock, dog-inspired cryptocurrency, or social media get-rich-quick frenzy. Instead, stick with tried-and-true principles, because they can work for almost anyone. I am reminded of the incredible story of Ronald Read, who, as a janitor, amassed a fortune of over $8 million which he donated to philanthropy. He retired as a janitor in 1997 and likely never made more than $30,000 per year in his lifetime. Yet through a combination of consistent investing, diversification, frugality, and time, he became incredibly wealthy.

This series was meant to introduce sensible investing to total beginners, but I hope even seasoned investors found it helpful in some way. If you’ve read any of the articles, you have my sincerest thanks. Happy investing!