I Want to Set Up an Investment Account

Alden Wicker

Determine if you’re ready to set up an investment account.

Investing is what you do after you’ve gotten all your other financial ducks in a row. If you answer yes to the following three questions, then you’re ready! If not, come back after you’ve taken care of these three tasks.

a. Have you paid off all of your credit cards?
If not, that debt will cost you more money than you would make by investing.

b. Do you have at least six months of your net pay in an emergency fund?
You always need pure cash on hand to help you out in case you lose your job, you receive a large unexpected medical bill, your car breaks down or another emergency comes up. The money you invest should be separate from this emergency fund. (Read more about saving here.)

c. Do you have a retirement account and are you maxing it out? If your company matches your 401(k) contributions, make sure to get the full match before you divert any money to your own investment account, or else you’re missing out on free money!

Save up enough to seed the account.

Many brokerages require you to invest a minimum amount, ranging from $500 to $2,500, in order to open an account. Even if you choose a brokerage with no minimum, you’ll need enough to spread your risk in several different investments, which is called diversifying. You should diversify your investments across companies, industries, countries and types of financial instruments, which protects you if one company or industry tanks. $500 is a good starting point, as it’s enough to buy a couple shares in ten different mutual funds or ETFs Investment vehicles that bundle together stocks for easy diversification..

You shouldn’t need nor have any plans to use this seed money for at least the next five years. Let’s say that after you invest $5,000, the stock market dips, shrinking your investment to $4,000. If you needed to pull your money out for an emergency, you wouldn’t have time to let it grow back, and you’d have to swallow the $1,000 loss. If you are considering using that money to go back to school or make a down payment on a home soon, stick it in a savings account instead.

Consider a discount brokerage.

There are two types of brokerages: discount and full-service. At a full-service brokerage, you’ll place trades with a person and pay someone to manage your investments for you. This is an expensive option, typically costing $150 per trade, and is best for people with sizeable assets to manage and very little time and interest in managing them.

So don’t be turned off by the term “discount.” While these brokerages let you trade in a matter of seconds for a fee as low as $4 per trade, they also offer useful tools and research.

Some discount brokerages include Scottrade, Fidelity, Charles Schwab, E*Trade and TD Ameritrade. They offer a range of services and charge different trading fees, and some even offer an initial bonus for opening an account. Just remember, you’re going to be with this brokerage for a while (you’re investing for the long term) so do your research carefully to find a brokerage you are comfortable with.

When you compare brokerages, consider:

  • Whether it charges a maintenance fee if your account value falls below a certain amount
  • How much it charges for each trade
  • The minimum to open an account
  • What kind of tools and research it offers
  • How easily you can get a representative on the phone
  • The bonus for opening an account
  • How easy the website is to navigate and use

One easy place to compare these features is through SmartMoney’s annual broker survey.  Once you choose a brokerage, it will walk you through the process of transferring money to the account.

Determine your risk profile.

In general, the sooner you’ll need the money you’re investing, the more conservative you should be. For example, if the money you’re investing is meant to help you buy a home in ten years, you will take on less risky investments than the ones you’d make for your retirement 30 years down the road. Lower-risk investments will grow more slowly but are less likely to drop drastically in value. But if you’re 26 and have no plans for your money for the foreseeable future, you could more comfortably buy reasonably risky investments, because over the long term they have the potential to grow faster—and if they don’t at first, you have the time to recoup your losses.

This also has to do with how thick your investing skin is. Even if you are investing for the long term, if you know yourself well enough to foresee a mini panic every time the stock market drops, you’re best off going with low-risk, low-return investments. Determine your own risk comfort with our quiz.

Your brokerage might even have a little quiz for you to fill out to determine your risk profile, which will spit out investment recommendations for you.

Choose your mutual funds and ETFs.

If you are dead set on buying the stock of your favorite company, we can’t stop you. But in general, LearnVest recommends buying mutual funds and ETFs. These are collections of stocks or bonds or other investments, so they make it a snap for you to diversify, automatically spreading your risk. They are also clearly labeled so you can easily build a complete portfolio. You can grab yourself an international fund, a fund that specializes in large companies, a fund that specializes in small companies, one that does tech stocks and even a fund that only invests in environmentally conscious companies! Almost anything you want is available. Many brokerages will recommend how you should split up your investments according to your risk profile and investment goals. You could also start with a basic book on investing, like this one, to determine your risk profile.

To search for your investments, use Morningstar, a website that rates the quality of funds according to a five-star system. (Brokerage firms often link to it.) Finally, choose no-load funds, which means that those funds don’t charge a commission for trading them (other than the brokerage’s trading fee), which saves you money.

OPTIONAL: Set up automatic transfers.

This step isn’t required, but it’s a great way to increase your investments. If you have room to spare in your budget after saving for your short term financial goals and contributing to retirement, set up an automatic transfer every month or after every paycheck to build up the value of your portfolio over time. This helps your “dollar cost average,” which means you buy shares in the funds you want to own at all different prices, and you often pay a lower price per share on average. Remember, profit is based on the difference between what price you paid and what price you sell at, so the lower the price you pay the better. But only do so if you have a solid grasp on your budget. Read more here to learn how to set up your budget.

Review your statements quarterly.

After choosing your funds, you can pretty much set it and forget it for a few months. You don’t want to make yourself nervous by tracking the stock market because you’re investing for the long term, remember?

Many people like to review their portfolio quarterly or semi-annually in order to return to their ideal asset allocation (a.k.a. balance everything out so you don’t find yourself with an overwhelming chunk in Chinese investments or consumer goods funds) or just make sure everything is running smoothly. Set yourself a calendar reminder to log in and see how everything is going at least twice a year.