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Brokerage Account Opening: Things to Do and Remember

After choosing a brokerage firm, you need to open a brokerage account before you can start trading securities. The following are the things you must do before you open an account with any brokerage firm.

Things to Do before Opening a Brokerage Account

  1. Make sure your broker is legitimate.

    Check whether or not your broker is registered with the US Securities and Exchange Commission.

  2. Find out about your broker's reputation.

    What are other investors saying about your prospective broker? You need to know whether your brokerage firm has a good reputation or if people are complaining about the way it does business.

  3. Sit down and talk with your broker.

    Try to determine where your broker's primary interest lies. Is it in helping you achieve your investment goals or is it in helping him/herself achieve his/her target commission?

    A broker who has your best interests at heart will present you with options. He or she will ask you about your income, assets, risk tolerance, investment goals, investing experience, etc. Only after your broker has drawn a clearer picture about your investing preferences will he or she start making investment suggestions.

  4. Carefully and thoroughly check the account application form and the brokerage account agreement.

    Ask your broker about anything you don't understand in that account application form. Do not sign the brokerage agreement unless you understand every provision included in it. Furthermore, make sure that special terms and concessions (if any) are in writing and are a part of the agreement.

    Finally, don't forget to ask your attorney to examine all your account-opening documents. In truth, you should do this whenever you have to sign a legally binding agreement of any kind.

Things to Remember before Opening a Brokerage Account

As above-mentioned, you will need to sign an agreement when opening a brokerage account. The account agreement sets the terms of your relationship with your brokerage firm. The most important provisions in them pertain to the following, so be sure to check them out carefully in your account agreement:

  • Your investment goals and your risk tolerance

    Why are you investing in securities? Are you saving up for retirement? Are you investing to build your wealth?

    Brokerage account agreements will ask you about your investment goals. You will be asked whether you want aggressive growth in your account. Perhaps you simply want extra income every month?

    What's not so obvious to first-time investors, however, is that each of the options under the investment goals' section comes with corresponding risk levels. Generally speaking, investment vehicles that promise "aggressive growth" are high-risk products.

    Before you choose an investment goal, you should first ask your broker about the risk levels associated with each of the available choices.

  • Investment account type

    The type of account you have will determine how you will fund security purchases.

    If you opt for a cash account, all of your security purchases will be made using the funds you have in your brokerage account. If you are buying stocks, your broker will get the money from your account. You need to have enough money in your cash account to cover a purchase. Otherwise, the transaction will not push through.

    If you opt for a margin account, you don't need to have enough money to cover every security purchase. You can borrow money from your brokerage firm when you're short of funds.

    In a margin account, you can buy more securities and build your portfolio faster. However, do not forget that a margin account means you are borrowing money. Just like any other loan, you have to have collateral. In this case, the securities and assets in your account will serve as collateral for your loan.

    With a margin account, you don't have absolute control over your securities. As long as you owe the brokerage firm money, it can lend your securities to others. It can do this without your permission, and you won't earn interest for this temporary use of your assets.

    A margin account also means monetary risks. If the value of your securities falls below the minimum requirement, your broker may sell your securities without first notifying you. With a margin account, you can lose all of your securities and still owe your broker money. This will happen if the value of all the securities in your account is less than the money you owe your broker.

  • Your broker's level of control over your account

    Most investment accounts are self-directed. As the owner of the account, you are the ultimate decision-maker. No securities can be bought or sold without your knowledge or consent.

    Some investors, however, choose to give their brokers discretionary power or authority over their accounts. Brokers with discretionary authority have power to buy and sell securities on their clients' behalf, if and when they want to do so, without first notifying or asking for their clients' permission.

    You should not give your broker discretionary authority unless you are totally convinced that it's the best thing to do. You should also make sure that the broker with discretionary power over your account is a qualified and registered investment advisor.

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