The Stansberry Research Guide to Opening a Brokerage Account

If and when you're ready to start investing outside of a retirement, but you've never opened a brokerage account before, don't worry.

In today's electronic world, it can be easier than opening a bank account...

Step 1: Know Your Needs

The first step in opening a brokerage account is determining what your investment goals and needs are.

The reason you need to "take stock" of yourself, is because your first decision will be to get a "full service" or a "discount" broker.

Remember, a brokerage firm (also called a "brokerage") is a company that acts as the middleman between the investing public and actual investments. Brokerage firms buy and sell public securities for their clients.

The defining difference between a "full service" broker and a "discount" broker is the level of "face-to-face" or "hands on" contact they offer to clients.

A full-service brokerage can offer frequent face-to-face human contact with their clients. You can literally walk into an office and get help and guidance for your investments. Full-service brokerage firms typically assign a single person to handle your account. You can frequently talk to this person on the phone. These brokers will even recommend investments for you.

Since full-service firms offer a high level of human contact, they charge much higher fees than "discount" brokers. If you're totally new to investing, and have little knowledge of stocks, then this type of brokerage can be a good choice.

But beware... Some full-service brokers push folks into ridiculous "high fee" investments, just so they can collect extra fees.

There's another possible negative in dealing with full-service brokers that you should be aware of... If the individual broker handling your account doesn't know how to conduct a particular transaction that could make you a lot of money, he might try to talk you out of the idea, simply because he is ignorant of it.

Discount brokerages are more appropriate for people with a basic understanding of investing. People who use discount brokers use the broker's website to conduct 99% of their business. With discount online brokers, you can enter your trades yourself... wire money in and out of the account... access tax documents, and many other things.

Because the bulk of the discount broker's operation is online... and because their clients do the bulk of the work themselves... they charge much lower fees than full-service brokers. With discount brokers, you can still talk to live people who can help you, but the level of service is lower compared to a full-service broker.

For example, the fee a broker charges you to complete a transaction (whether you are buying an investment or selling one) is called a "commission."

Some discount brokers' commissions are just $5 or $10 per transaction. But a full-service broker could charge you as much as $50 or $100 per transaction. If you are an investor with a modest account (like less than $10,000), choosing a discount broker is smart. Paying extremely high fees could cripple your $10,000 account.

Bottom line: If you are brand new to money and finance, and don't know the difference between a stock and a bond... going with a full-service broker can be a good idea. But the vast majority of people are better off picking up a basic investing book (like The Wall Street Journal Complete Money & Investing Guidebook), learning the basics, using a discount broker, and saving money on commissions.

Step 2: Selecting the Individual Broker

Even though most online brokerages are technically "discount" firms, the quality of support and services varies among companies.

Again, with discount online brokers, you can still talk to live people if you need assistance. Just keep in mind that some may charge you to speak with a live person. For others this may be free, or they will only charge you for assisting in uncommon trades.

Explore different brokerages' websites, and even call them with specific questions. Your experience with them should give you a good sense of how they treat people. Then you can select your favorite.

Once you've determined your broker, simply go to the company's website. Every quality broker will have a big "Open an Account" button. Click on that button and follow the company's instructions.

You'll be required to provide all the regular personal pieces of information that any other financial company requires. It's similar to opening a bank account. You'll have to provide your name, social security number, email address, physical address, etc.

Brokers make signing up for an account very easy (it's in their best interest), so just follow the instructions. But before you officially sign up as a client, the brokerage will want to know what type of account you want.

Step 3: Selecting the Right Account Type

Step 3 is a little more complicated than the first two, but it's for a good reason... this step matches the specific type of brokerage account with your individual trading needs. Once Step 3 is complete, you'll be ready to trade. We've broken Step 3 into "mini-steps" in order to help keep everything straight.

Risk Tolerance

After you've decided which type of brokerage (discount or full service) is right for you and submitted some basic personal information... the third step is to identify your risk tolerance. Your broker may ask you this question. And your answer will usually determine what type of accounts the brokerage will make available to you. Let's explore this a little further...

There are four general breakdowns in risk:

1. Conservation of Capital
2. Income
3. Growth
4. Speculative

If you are only planning on making conventional "long" stock purchases, you might select any (or all) of the first three choices...

But if you plan to execute more advanced trades (shorting stocks, options trades, etc.), you should include "speculative" within your risk tolerances as well.

Please note: Most people don't understand speculative investment vehicles like options. The reason they were created in the first place was to reduce risk. Unfortunately, unskilled investors misuse them, which is why they are thought of as "risky." Selecting a "high risk" tolerance will allow you to make these more advanced trades.

Account Type

After nailing down your risk tolerance, the brokerage will typically ask you to select your account type. The most common are "cash only" and "cash and margin." Some brokerages will also break out an "options" selection, too.

The important thing to do here is carefully read the explanations for each account type. Select the one which will enable you to execute your style of trading.

Tax Status

You may be asked to choose the tax status of your investment account. Your choices could be a standard brokerage account, or a type of retirement account. Retirement accounts (IRA, Roth IRA, and others) operate in much the same way as conventional brokerage accounts... but there may be additional restrictions on them due to differing tax treatments. Contact your tax advisor to determine your best approach for retirement planning.

Remember, you can always open a conventional account and later roll over funds into a tax-advantaged account. Again, talk to your tax advisor.

Funding Your Account

The last part of Step 3 is to fund your new online brokerage account.

Typically, your brokerage will give you a certain length of time to complete this transaction – usually about 10 to 14 days. If you are in no rush, cut them a check and mail it in... But if time is of the essence, the fastest way to fund your account is via wire transfer. Your brokerage will give you the routing details and/or mailing address.

Please note: Many brokerages also offer their own banking services. Some even go so far as to issue debit cards on investment accounts... Be careful! You don't want to be out buying groceries and end up having to liquidate your investment positions...

Helpful Tips

• If you desire a brokerage with phone support, some online brokers have long wait times... test them out first. If the wait time is longer than 30 seconds or so, choose another broker.
• Super-successful money manager Peter Lynch recommends you never put any money into a brokerage account that you will need in the next six months.
• An even better approach is to keep investing money for investing purposes only. Only after you have amassed a sizable savings account (6-12 months of expenses) should you open a brokerage account. Keep your investment account and your savings account funds segregated.
• Many online brokerages offer a wide selection of educational material. There is usually substantial research data included as well. Whether you are looking to explore new trading techniques or do some digging into a company you've got your eye on, it pays to take advantage of all this "free" content.
• Be vigilant with your personal information and login details. E-mail "phishing" scams can appear quite legitimate at first glance. NEVER input your login info into anything other than the actual brokerage webpage. Furthermore, always be certain the website is encrypted (with https:// at the beginning of the address).

Congratulations! You've just learned all the steps necessary to open your very own brokerage account.

Making Your First Trade

Once you've completed these steps and opened your new account, you're ready to make your first trade. Let's go over a few of the basics to get you completely comfortable with the process.

Let's say you want to buy 100 shares of Intel (Nasdaq: INTC)... (Keep in mind, what you're about to read is for educational purposes only and is not a recommendation. The prices may or may not reflect what is actually available.)

First, you'll need to access the actual "trading platform" inside your brokerage account. The trading platform is the individual webpage where you can input the specific details for each trade. The trading platform will usually be listed under a "Trade" or "Trading" tab on the webpage.

Once you're inside the trading platform, you'll have to input some information into the appropriate fields, in order to complete the trade. This information includes things like: order type, quantity of shares, symbol, price type, and term.

Order type in its most basic form is pretty simple... either "buy" or "sell." You may or may not see some other choices listed as well (like "sell short"), but for our purposes we will select "buy."

Quantity of shares is exactly what it sounds like... the desired amount of shares you want to buy. For our example, input "100" for 100 shares.

Symbol is the abbreviated code that the stock goes by... you know, the ones you see on the scrolling marquee signs in New York City. Sometimes they are intuitive in relation to the company's name, but not always. In our case, Intel's symbol is INTC. Plug it into the field.

At this point, it is likely that the current trading conditions for the stock you just input will come up. This includes the current price of the stock, how much it has risen or fallen that day (in terms of price and percentage), and a listing of the bid price, the ask price, and volume for the day's trading.

The bid price shows what buyers are willing to pay for the stock. The ask price shows what sellers are willing to accept for the stock. The volume shows the number of transactions that have taken place with that stock on that day.

For companies whose stock is highly liquid (i.e. there is a huge number of shares available for trading), the bid/ask spread is likely to be rather small. Smaller stocks with less liquidity often have a higher bid/ask spread.

Price type explains some of the conditions for executing your trade. You may see a wide variety of choices. For a basic trade like our example, the type you might select would be "market," "market on close," or "limit."

Selecting "market" will tell the broker to execute the trade at wherever the current market prices are. "Market on close" means the trade will be executed as close as possible to the end of the trading day, at whatever price the market is offering at that time. Lastly, "limit" allows you to put in a specific price for the trade. If the market never reaches the limit, your trade will not be executed.

For most trades, placing a "limit" order will give you the best possible price. Say the market price for Intel is listed at $22.40 per share. The current bid is $22.40, the current ask is $22.41. Select "limit" for your price type, then input $22.40 for your order.

Think shares will drop to $20 flat that day? Then input $20.00 for your limit order. Just remember, if the market doesn't drop to your limit price, your trade will not be executed.

Please note: You may see selections incorporating a "stop" or "trailing stop" under the price type category. Two of the hallmarks of superior trading are maintaining appropriate position sizing and rigid stop-losses.

However, never enter your stops into the market. That is like buying into a high-stakes poker game and then playing your hand face up on the table for everyone to see. How long would you expect to keep your chips?

Term is the last major input you must select. This is where you specify the length of time that your trading order remains in effect.

Usually your choices for term length include "good for the day" or "good for 60 days" or "good till cancelled." You may also see other more advanced terms (like "fill or kill"), but for our Intel example, we're just going to enter "good for the day." This means that if the market aligns with your trading order anytime on this day, the trade will be executed. If it doesn't happen by the close of trading, your trading order will expire.

If you have questions about of any of these terms, click on the "help" or "?" icons on your broker's website.

After you have included all the order information, the trade is almost ready to be executed. There should be a big "preview order" button that will summarize all the data you just input. The process should feel very similar to an online credit card purchase...

Take this opportunity to review and double-check all the information presented. This will be your last opportunity to make any corrections to the trade before it "goes live."

If all looks good-to-go, hit the "execute trade" button and the trade will be entered into the market. After you execute the trade, your brokerage will give you a confirmation page with the details, including commissions incurred for the trade.

Depending on current market conditions and the specific limits you chose, the trade may happen quickly, or it may not happen at all... just check back in to see your order's current status at any time after you entered it.

In our hypothetical example, the Intel trade is executed quickly. Your account now shows 100 shares of Intel stock, purchased for $2,240.00 + commissions. Congratulations, your "first" trade is complete!

For our full Stansberry Research guide on how to invest in stocks, click here... it's 100% free.