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How to Set Up an Online Brokerage Account

Dawn Reiss

Think of your brokerage account like the quarterback of a football team. It helps you play call your investing directives no matter what type of formation you're using.

Just like the gridiron, it all depends on your lineup, which may include mutual funds, exchange-traded funds, individual stocks, bonds and CDs.

After depositing funds into an account, you can then direct a brokerage firm to carry out transactions on your behalf, much like a coach on the sidelines.

"The average retail investor opening a brokerage account needs access to a bit more variety than a company 401(k) plan," says Dominique Henderson, owner of DJH Capital Management in Cedar Hill, Texas. "Look for low-cost mutual funds or index funds to build a diversified portfolio and keep it boring."

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Start by assessing yourself and your financial goals. Ideally this is done with a financial planner who understands your goals. Are you a buy-and-hold investor or an active trader? This will help you determine what kind of account is preferable for your style of investing.

Have your forms and financials ready. Be prepared to give some personal information including your name, address, social security or EIN number, phone, email, marital status, your mother's maiden name, a financial statement information for assets or cash you may want to transfer. The Patriot Act requires financial services companies to verify their customers and this sometimes includes your driver's license information as well as your employer's name and address typically if you are or an immediate family member is a senior officer or larger shareholder of a company.

"It's pretty simple nowadays with technology," says Mike Hohf, a certified financial planner and financial advisor at Advance Capital Management in Southfield, Michigan.

Know if there is a minimum deposit. For example, Scottrade, a privately-held company, requires a minimum deposit of $2,500 for an individual or joint brokerage account. Fidelity also requires the same minimum. A Charles Schwab Corp. (SCHW) Schwab One brokerage account has $1,000 minimum, but that fee is waived if the account is linked to your checking account. E-Trade Financial Corp. (ETFC) investing and trading accounts requires a minimum deposit of $500 within 60 days of opening an account to remain active.

TD Ameritrade Holding Corp. (AMTD) doesn't require a minimum to open an account unless an investor wants to have access to riskier margin and options privileges, which requires a $2,000 deposit.

Robinhood, a commission-free trading firm based in Palo Alto, California, allows investors to sign up for its app and then trade for free without making a minimum deposit, making it a popular alternative for those looking to avoid fees. "The downside is they don't have a Roth or traditional IRA, so it's just individual accounts and it's only on a mobile platform," says Brian Littlejohn, the founder of Sherwood Investment Management in Petaluma, California. "But it's a unique strategy."

Although Littlejohn runs his business through TD Ameritrade, he says he has friends who love using Robinhood because it's simple, easy and free. "It's pretty amazing that they can offer it the way they do," he says.

Jack Randall, head of communications at Robinhood, says that's possible because everything is automated and computerized and less physical day traders that filled the stock exchange floors of a bygone era. "We've streamlined the whole process," he says. "We are basically a software company."

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Robinhood makes money by collecting interest on the cash sitting in its accounts and by charging interest on the margin services it's currently testing, Randall says. "There's a false misconception globally that there's an inherent cost with trading," Randall says. "That's false because execution costs have shrunken exponentially. Since it's an electronic transaction, there's no reason to be charging $10 a trade anymore."

It's a concept that appeals to millennial-based investors. The average age of a Robinhood customer is 28, and 25 percent are first-time investors, Randall says.

Review the cost of trading, level of service and technology. Look at trading and transaction fees, monthly and annual service fees. Most brokerage firms offer flat-fee rates that typically range from $7 to $20 per online equity trade. For example, TD Ameritrade charge a $9.99 flat-rate per online equity trade and no platform fees while Scottrade starts at $7 for online trade. Keep in mind, most broker-assisted trades cost much higher, typically in the $25- to $45-per-trade range. Fees are significantly cheaper for online trading versus the phone.

"If you're a passive investor who isn't going to be trading a lot, having a free trade isn't going to matter as much," says Ben Malick, founder of Three Nine Financial, a Christian-based investment management firm in Grain Valley, Missouri. "On a lot of these brokerage platforms ETFs are free to trade, but you'll pay more in the management fee on the back end."

Make sure to review monthly service fees or any annual maintenance fees, which can vary depending on the institution. Ask who is the custodian of the account and where the funds are going to be held, Henderson says. "Review each online brokerage and think about how you plan to use the account," Hohf says. "Select a brokerage firm that has low costs, great technology and provides customer service in case you need it."

Keep it simple and do your research. "It's not going to be quick, you're going to have to do some reading," says Henderson, who recommends reading the online site Investopedia to learn basic terminology.

Keep in mind reading research on a stock is someone's opinion, Hohf says, who suggests reviewing Morningstar reports. Each account may have access to slightly different funds based on the brokerage's knowledge base and preference for certain funds.

Each account has access to slightly different funds. Some brokers will offer a larger number of commission-free ETFs or certain types of securities. "The biggest mistake I hear from first time investors is when they say, 'I want to try investing and buy a stock. What do you recommend?'" says Thomas Watts, CEO of Watts Capital Partners, a registered investment advisor in New York.

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"When you're starting out, one should invest in broad-based, low-cost mutual funds or exchange-traded funds that are diversified across hundreds of stocks and bonds," he says. "These are much lower risk because even professionals find it difficult to pick a single stock that will perform better than an ETF or mutual fund."

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