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Outside of your 401K……
are you new to investing?
Not sure how to get started?
You’re not alone.
Investing is important yet not many of us know how to get started other than investing in your 401K.
Today’s article discuss the importance of investing, what is a broker, why you need one, and how to open your 1st brokerage account.
Let’s get started!
Why You Should Invest?
Many of us are taught at a young age that saving is the most direct path to building wealth. Unfortunately, that is not entirely true.
As I talked about in this article,
How To Use The Velocity Of Money To Grow Wealthy
While good saving habits are the engine that drives your pursuit of building wealth and achieving financial freedom, investing is the vehicle that enables you to cross the finish line. In other words, the ability to invest wisely and being smart with how your money is invested makes achieving financial freedom MUCH more attainable.
To get started investing may seem daunting since the major reason people hold back is that they don’t want to risk losing their hard-earned money to obtain financial gain.
Saving money is easy, consistent, requires both discipline and a budget to make it happen. Often, we learn how to save from watching our family do it.
On the other hand, investing requires knowledge, education, research, and an even temperament. Investing knowledge is not usually taught or shared among the family, if they even invest at all (like my parents never did).
Because of this, some people think the risk is not worth the reward.
I beg to differ.
For starters, the risk is in the investor NOT the investment. I firmly believe that literally any type of investment can be worthwhile if it fits your Investor DNA, knowledge, and interests.
If you have a true interest in what you are investing, you will want to learn as much as you can about it. You’ll ask a ton of questions to understand the inherent risks and how to mitigate the risks.
Where you run into trouble is if you blindly invest in something you do not understand. I talk a lot about this in the article below.
Want to take a more conservative approach and save your way to wealth? Good luck.
The unfortunate fact is that putting all your money into a savings or money market account will not keep up with inflation. That’s just the cold, hard truth.
On the other hand, learning how to invest and how to make smart business decisions will help you reduce risk, increase reward, and achieve financial independence faster.
The way most people invest their money is in the stock market. If this is in your wheelhouse and is part of your Investor DNA, then you’re in luck. Getting started has never been easier and today’s article will cover how you can get started today.
Today’s article will cover what is a broker and brokerage account, why you need it, how it works, and so much more!
What Is A Broker?
To invest in stocks, you cannot directly buy off the stock market without a special license issued by the Federal Trade Commission (FTC).
In order to buy stocks, you need to work with an intermediary. In the past, people worked directly with a stockbroker (who has that special license) to buy and sell stocks. A person placed the order, and the stockbrokers enacted the mechanics of the trade on others’ behalf.
In the old days, stockbrokers knew you needed them and charged you ALOT of money for their services.
Today, you can setup a brokerage account online for a lot less money.
What Is A Brokerage Account?
A brokerage account is a financial account that allows you to buy and sell stocks, bonds, mutual funds, index funds, currencies, futures, options, derivatives, and other kinds of investments.
The financial institutions (think Fidelity, Charles Schwab, etc.) allow you to piggyback on their license so you do all the work, and they get to still earn fees for their “services”.
You can choose to work with financial advisors online to make stock trades or use robo advisors who do the heavy lifting for you.
I discuss robo-advisors in detail in the article below:
How Do Robo-Advisors Work To Make You Money?
5 Tips For Choosing The Right Robo-Advisor
You can transfer money into and out of the brokerage account like a bank account, but the purpose of the account is for gaining access to the stock market and investing not saving.
Brokerage accounts are sometime referred to as taxable accounts because the investment income within a brokerage account is subject to long-term capital gains taxes NOT income taxes.
There is a misconception that brokerage accounts do not have tax advantages, but it does. Capital gains taxes are usually much less than income taxes.
How much less?
Depending on your income and filing status, long-term capital gains tax rate can be anywhere from 0% to 20%.
How Do Brokerage Accounts Work?
Like I said above, brokerage accounts are like bank accounts, but for investing with stocks, bonds, REITs, index funds, etc. As with bank accounts, you can deposit and withdraw money both into and from your brokerage account whenever you want.
Brokerage accounts also have some major differences too. Brokerage accounts let you make investments that have far greater returns than bank accounts.
Unlike bank accounts, the value of the account can go up AND down depending on how well the underlying assets in the account perform.
Also unlike bank accounts, brokerage accounts do not have FDIC insurance protection that will protect you from losses.
Many brokers allow you to open a brokerage account online quickly and easily while not needing a lot of money to open it. In fact, some allow you to open an account with as little as $100.
Then you need to have the fund deposited into your account before you purchase any investments. This is done by simply transferring money from your checking or savings account into your brokerage account.
You own the money and investments in your brokerage account and can buy/sell them at any time.
The broker’s job is to hold your account under their license and acts as the intermediary between you and the investments you purchase.
There is no limit to the number of brokerage accounts you can own or the amount of money that can be held in a single brokerage account. In fact, some people setup different accounts for different purposes.
Want to save for a home? Setup a brokerage account and watch your money grow faster than in a savings account.
Want to create an FU fund for quitting your job in the future? Setup a separate brokerage account to do so.
The possibilities are literally endless.
Want to know how to open your 1st brokerage account? We’ll cover that next.
How To Open Your 1st Brokerage Account
Setting up a brokerage account is a simple process. We’ll go through the steps to open an account today.
Select An Online Broker
To get things started, you need to select an online broker. There are 2 schools of thought for selecting an online broker: do you want to control the selection of stocks, bonds, index funds, etc. or do you want to trust the broker to help you do this?
If wanting to do it yourself, you may want to start with one of the tried-and-true brokerage services such as:
If wanting to trust an automated service (i.e., robo-advisor) to do the hard work for you, you may want to start with one of these robo-advisor brokerage services such as:
- M1 Finance
- Vanguard Digital Advisor
- Fidelity Go
- Charles Schwab Advisor
- Betterment
- Empower (formerly Personal Capital)
- Wealthfront
- SoFi Invest
Either approach you take, just be sure that the brokerage choice is right for you and your needs.
Complete An Application and Account Setup
Once you select an online brokerage to work with, you need to complete an online application which takes anywhere from 15-30 minutes. They will ask for your basic information such as name, social security number, date of birth, etc.
Once the application is approved and an account opened, you’ll need to setup the account.
To setup the account, you’ll need to link to the primary banking account where money will come from and be sent to when you cash out an investment.
Some brokers may require you to verify a transaction. If that is the case, you’ll have to wait until the broker deposits a small sum into your bank account, usually a few cents, and then you confirm the exact amount deposited.
After the transfer is complete and account becomes active, you can then deposit money into your account and start investing.
Research Your Investments
No matter which type of brokerage to use, always do some of your own research. If using a robo-advisor, it’s ok to double-check their work and change their picks if you do not like what they are choosing for you.
Odds on, you may trust their judgment, but it’s a great launch pad to start learning how to invest.
If taking the opposite approach, now is the time to do your homework.
A good place to start is with companies you know and use every day because owning stock in a company is becoming an owner in that company.
So why not own a company you use, like, and is widely recognized?
You have blue-chip choices like Visa, Home Depot, Target, Johnson & Johnson, etc.
You can also invest in companies you use for side hustles like Fiverr or companies whose services you use like, Amazon, Pinterest, or Shopify.
To do the research, look at a company’s annual report as well as their main metrics like EPS and P/E ratio to find a good deal.
Also, the brokerage service you use should have analytical tools you can use to do further analysis and find the right companies for you to invest in (i.e. like M1 Finance 😊).
Choose The Stock Order Type (If Buying Stocks)
If not investing in stocks, skip this section.
However, if buying stocks, you need to pick the type of order to place.
Why does it matter?
Because the type of order can affect the purchase price of the stock and affect your profits overall.
Here are some common terms you need to understand when investing in individual stocks:
- Bid – The price buyers are willing to pay for the stock.
- Ask – The price sellers are willing to sell the stock for.
- Spread – The difference between the highest bid price (what buyers willing to pay) and lowest ask price (what sellers are willing to accept).
- Limit Order – A request to buy or sell a stock at a specific price or better.
- Market Order – A request to buy or sell a stock ASAP at the best available price.
- Stop-Loss Order – Once a stock reaches a certain price, a market order is executed, and the entire order is completed.
- Stop-Limit Order – Once a certain price is reached, a limit order is executed and filled to the point where the specific price limits are met.
We’ll discuss the definitions in detail in a future article. For now, this will get you started.
For beginners, I recommend using a market order to buy and sell stocks. The reason is that most beginners are buy-and-hold investors. The small differences in time from starting to executing an order does not impact your overall performance.
Once you have found stocks, bonds, index funds, etc. you want to invest in, next you’ll want to set up a proper allocation.
Assign Asset Allocation
Why worry about asset allocation? To minimize risk.
If you do not take risk into account, odds on your portfolio will underperform your expectations and not meet your long-term financial goals. Just sayin’! 😊
A well setup investment portfolio will mitigate risk in both a recession and inflation.
But how do you determine a proper allocation?
I recommend starting with the Rule of 110.
To determine the percentage of your portfolio that should be kept in stocks and stock-based index funds, simply take 110 minus your current age.
For example, let’s say you are 25 years old. To find the correct stock mix for someone in your retirement horizon, take 110-25 = 85.
For this 25-year-old person, they should hold approximately 85% of their portfolio in stocks.
Another aspect of asset allocation is rebalancing.
Rebalancing occurs periodically when you check on your portfolio performance.
A simple way to rebalance is the 5/25 rule.
The “5” means that if any large asset classes (greater than 10% of your overall portfolio) deviates by 5% of your intended mix rate, then you rebalance.
For example, let’s say that your asset allocation calls for 25% to be held in large cap stocks. If it creeps up to 30% (or more), sell off just enough to get back down to 25%.
The “25” is used for re-allocating smaller portfolio portions (less than 10% of your overall portfolio). Whenever your allocation changes by 25% of that mix rate, you rebalance.
For example, let’s say you owned 5% of your portfolio in bonds. If over time, that allocation creeps up to 6.25% (25% more than your allocation), it’s time to rebalance.
The Bottom Line
Today’s article was intended to provide the basics and some rules of thumb to get started with investing using a brokerage account.
While it may seem a little intimidating at first, it’s like anything else. The more you do it, the better you will become.
Remember when buying stocks online to find an easy-to-use broker you feel comfortable working with, research the assets you are interested in, decide how much you want to invest, buy them, and then make sure you allocate the assets to maximize returns and minimize risk.
Until next time……..
Live The Life You Love, Want, And Deserve! 😊
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So, what do you think about today’s article? Think it can work for you? I’d love to hear your comments and reaction. Send me an email and let’s chat!
Do you have ideas for future blog posts? I’d love to hear your comments.
