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Opening an Online Account

When opening an online account you’re likely to have a number of questions. What sort of account am I opening? Should I fund it from my bank account? I’d like to roll all my investments into one account. Can I do that here?

Typically, you can choose to apply by mail, or apply online. When you choose to apply by mail, you will be asked for your name and address. Your online firm will send you the application materials to complete and return. When you choose to apply online, you can complete your account application directly through the online brokerage firm.

While every online brokerage account sign-up process is different, the following are the key elements found at all major online brokerage firms.

Selecting your account type: Brokerage firms – whether online and “off-line” – offer several different types of accounts.

The type of account you choose will depend on whether the account is taxable or tax-deferred and for just you (individual) or for you and another person (joint)

Your choices may include the following:

  • Personal Accounts (Non-Retirement)
    -Individual
    -Joint
    -Custodial (minor)
  • Retirement Accounts
    -IRA (Traditional, Rollover, ROTH)

Choosing a "Cash" or a "Margin" Account

Once you have chosen the type of account, it’s time to move on to the very important task of choosing whether your account will be “cash” or “margin.”

What’s the difference? Having a “cash account” means you may place trades for investments using ONLY the money in your account. A “margin account” involves a line of credit from your brokerage firm to buy stocks or other securities.

To learn more about how margin accounts work, check out the “How Margin Accounts Work” section of this website.

You also have the option of opening a “margin account with options.” Buying an “option” means that you are purchasing the RIGHT to buy or sell a stock at a specific price.

You should know that options are complicated and only appropriate for experienced investors of substantial means. If you have chosen a “cash account” you need to put money in that account.

Your initial deposit can be made:

  • through an automatic transfer from your bank account (most brokerage firms offer this service during working hours), or
  • by sending a check to the firm to be deposited.

You also can open an account with existing stock or bond certificates, transferring holdings from an account at another brokerage firm, mutual fund or bank, or with stock or bond certificates.

Be aware of the fact that most brokerage firms have minimum deposit requirements for the opening of a new account.

Providing personal information

In order to open an account, your brokerage firm needs to know a good deal of personal information about you. The information is needed for account handling, tax tracking and other purposes. Congress recently passed the USA PATRIOT ACT which requires brokers to collect and verify certain personal information. Investors are always required to provide accurate personal information about themselves.

In addition, there may be occasions in which the brokerage firm needs to contact you, such as:

  • to discuss changes in your account
  • to verify sales or purchases, or
  • to let you know about a margin call.

Important note: Online brokerage firms have policies regarding your privacy and how this information is handled. Make sure you take the time to familiarize yourself with the brokerage firm’s rules for the handling of your personal information.

The following is a list of the personal information a brokerage firm will likely collect:

  • Full name
  • Street address
  • Phone number
  • E-mail addresst
  • Social security number
  • Date of birth
  • US citizenship status
  • Place of employment
  • Annual income
  • Networth (excluding home)
  • Federal tax bracket

You can also expect the brokerage firm to ask you if:

  • you work for a registered broker/dealer, and
  • whether you are a director, 10 percent shareholder or policy-making officer of a publicly owned company, including the name of that company. (If you are a registered representative of a brokerage firm or a 10 percent or more shareholder in a company then you may have special disclosure obligations.)

With regards to a “cash account,” the brokerage firm will ask you where you want to keep your cash in between investments. While the options vary by brokerage firms, the following are some examples.

  • Mutual Treasury Fund
  • Mutual Tax-Exempt Fund
  • Mutual Prime Fund
  • Money Market Account

Determining your suitability

You are now at what is one of the most important steps in the process of opening an investment account. Brokerage firms must comply with what are known as “know your customer” or “suitability” rules.

This means that the brokerage firm has to determine each investor’s ability to handle investment risk.

During your application process, the brokerage firm will ask you questions designed to figure out how much investment experience you have.

It is important that you be 100% honest about your experience. Incorrect information could result in your being exposed to more risk than you can handle – and the loss of funds greater than what you can afford. Most brokerage firms ask investors to put themselves in one of four distinct categories: aggressive growth, growth, income and capital preservation.

  • Aggressive Growth – Investor intends to trade volatile securities. “Aggressive growth” securities tend to incur a greater level of risk.
  • Growth – Investor wants to gain money in the account while preserving the original capital as much as possible. The “growth” objective is more conservative than aggressive growth.
  • Income – Investor intends to use the profits from the account as a source of income. The “income” objective is more conservative than growth.
  • Capital Preservation – Investor intends to use the account to save existing assets. The “capital preservation” objective is more conservative than income.

Once you complete the necessary information to determine your investment suitability you will be asked to accept a legal agreement, stating that the information you have provided is correct, that you have read the firm’s customer agreement, etc. Make sure you read all of this material and take the time to understand the implications for you.


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