Stock Market Investors » Stock Broker Classes and Commissions » Things to Consider When Opening a Brokerage Account

Things to Consider When Opening a Brokerage Account

If you want to invest your money in the stock market you will need to open a brokerage account. However there are a few things that you should consider before you sign the new account agreement in order to ensure that you make the right decisions.

To start with, you need to decide how much risk you are willing to take on. The level of risk you choose should reflect properly you investment objective. You would be able to choose from different categories labeled according to their risk, such as "income", "growth in income", or "aggressive growth". Make sure you understand completely the category of risk you choose and that it matches accurately your investment goals.

Consider carefully who should have the final say on your investment decisions. You may decide to give "discretionary authority" to your broker but that means that your broker will be able to invest your money without being obliged to consult you first about the security type, the price, the amount, and when to sell or buy. Therefore, always have in mind the risks involved in granting another person the control over your money and do not give discretionary authority to a broker if you cannot trust him/her completely.

Decide how you will pay for your investments. You may choose to open a "margin" account and actually borrow money from your broker in order to buy securities in exchange for a portion of the purchase price.

However, if you choose this option you should make sure that you understand very well how margin accounts work.  Take into account that if the stock price drops significantly and abruptly you may need to pay back the entire margin loan at once. Additionally, your brokerage firm may sell immediately and without notice any security in your account in order to cover any shortfall as a result from the drop in the value of your securities. What is more, it may turn out that you still owe money even after your securities are sold.

Instead of buying stocks on margin, most investors prefer maintaining a "cash" account and paying in full each security purchase.

Finally, always review all the information in the account agreement before you sign. Your account agreement will determine all legal rights regarding your new account. Do not sign it if you do not agree with any of the terms and conditions it imposes. Have in mind that the brokerage firm may also request the signing of a legally binding contract to arbitrate any possible future dispute between you and the firm which will actually deprive you from your right to sue the firm in court.

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