The brokerage account
- first rung to personal investing

A website section on banking accounts cannot be complete without mentioning the brokerage account.

You need checking accounts to store money for spending throughout the month. You need savings accounts to store money for medium to long term safety, with better returns. You need Certificates of Deposit (CDs) for greater returns with reduced liquidity. But if you need to increase returns on your money even further, albeit at increasing risk, you must consider the brokerage account. This type of account allows you to invest in stocks, bonds and mutual funds.

While I personally invest in stocks, this section is not about the vices and virtues of investing in equity markets. It does not purport to replace your financial consultant or give you advice on personal finance management. But it does describe the mechanism for stock and bond investment, should you go that route, after moving to America.

The way it works is simple: you open a brokerage account with a financial institution, deposit money into it, and use that money to pay for stocks, bonds, options, mutual funds and other investment instruments that you buy. When you sell an instrument, the proceeds are deposited back into the account. Most major banks and lots of specialized brokerage firms offer these type of accounts.

Why do you need a separate account for this activity, you may ask? Why not just pay for the instrument directly, using your regular checking account? You could, but you still need a brokerage account to engage the services of a broker ('agent') to complete the trade for you and to hold custody of the stocks you buy. Hence such an account remains distinct from other types of accounts, though it might be 'funded' through your normal checking or savings account.

There are 2 categories of brokers (and hence brokerage accounts) - 'traditional' and 'discount'. Traditional brokers provide a full range of services - from personalized financial planning and asset allocation to running your portfolio for you. In exchange, they charge a high commission per trade, and additional fees for services like research or recommendations. Discount brokers are for the self-directed investor. They provide trading services with online research and analysis tools but no personalized advice. Of course, they charge much less per transaction. Some institutions offer both services.

The minimum opening balance that you need to set up an account is usually $500 - $1000. The minimum commission per trade (irrespective of transaction value) is usually $8 - $15. You can choose an account either with a bank (like Citibank or Bank of America) or with a specialized broker (like Charles Schwab). Opening the account is simple - you need to fill in paperwork and everything can be done in a day or so. Visiting a branch is not necessary - forms are generally available online and can be faxed in.


Readers have recommended the following companies as examples of cost-effective discount brokers:

Personally, I vouch for Sharebuilder. This online-only discount brokerage firm charges $4 per trade and does not require any minimum opening balance.

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