Investor Bulletin: How to Open a Brokerage Account

The SEC’s Office of Investor Education and Advocacy is updating this Investor Bulletin to help you understand what to expect when opening a brokerage account, including what information you will need to provide, what decisions you will be asked to make, and what questions you should ask your broker.

Brokerage accounts differ from investment advisory accounts, which generally are governed by different rules and regulations.  For information on opening an advisory account, please see our bulletin: Opening an Investment Advisory Account.  For additional information on working with broker-dealers and investment advisers, please see Investor.gov’s Working with Brokers and Investment Advisers.

Before opening an account with any broker, you should always remember to read the firm’s relationship summary (Form CRS) and check the broker’s background and disciplinary history. For guidance in finding a broker’s background or disciplinary history, as well as other tips to consider when selecting a broker, please read our bulletin How to Select an Investment Professional.

Information You May Need to Provide

Brokers generally request personal information from their customers, including financial and tax identification information. Brokers need this information to comply with laws and other regulations. Some of the information a broker will likely ask you to provide includes:

  • Your name
  • Social security number (or taxpayer identification number)
  • Address
  • Telephone number
  • E-Mail address
  • Date of birth
  • Driver’s license, passport information, or information from other government-issued identification
  • Trusted Contact Information
  • Employment status and occupation
  • Whether you are employed by a brokerage firm
  • Annual income
  • Net Worth
  • Investment objectives and risk tolerance 
  • Other investments
  • Investment experience
  • Investment time horizon
  • Liquidity needs

For additional information on why brokers require this personal information, please see What to Expect When You Open a Brokerage Account, a publication from the Financial Industry Regulatory Authority (FINRA).

Decisions You Will Need to Make

  • Would you like to open a cash or margin account?

Brokerage firms generally offer at least two types of brokerage accounts – a cash account and a margin account:

  • In a cash account, you must pay the full amount for securities purchased. You may not borrow funds from your brokerage firm in order to pay for transactions in the account.
  • In a margin account, you can borrow funds from your brokerage firm to purchase securities (this is called buying securities “on margin”). The brokerage firm uses the securities in your margin account as collateral for the money it lends to you to purchase these securities and you pay interest on the money you borrow. Margin accounts can offer you greater purchasing power, but also expose you to the potential for larger losses.

IMPORTANT: WHEN OPENING A BROKERAGE ACCOUNT, SOME BROKERAGE ACCOUNT APPLICATIONS MAKE

MARGIN ACCOUNTS

THE DEFAULT ACCOUNT TYPE.

CONFIRM

YOU ARE OPENING THE ACCOUNT TYPE YOU WANT BEFORE YOU SIGN YOUR ACCOUNT APPLICATION. 

For additional information on margin accounts and cash accounts, please review the SEC Investor Bulletins “Understanding Margin Accounts” and Trading in Cash Accounts.

  •  What are your investment goals and how much risk are you comfortable taking?

When you open a new brokerage account, you may be asked to specify your overall investment goals (or “objectives”) and how much risk you are willing to tolerate. Different firms use different terms to describe investment objectives or risk tolerance levels. Some common terms are: “capital preservation,” “income,” “growth,” “moderately aggressive,” “aggressive growth,” and “speculation.” Make sure you understand what these terms mean and how much risk is involved with each objective. In selecting an objective/risk category, you should also consider when you expect to need fast access to the funds in your account. If you have questions, ask your broker.

  • How do you want to manage cash in the account?

Sometimes you may have cash in your brokerage account that has not been invested. When you open a brokerage account, your broker may ask you to choose a cash management program for this uninvested cash or by default, may place your uninvested cash into a particular cash management option. Brokerage firms may offer several cash management programs to their customers:

  • A bank sweep program involves the automatic transfer of any uninvested cash in the brokerage account into a deposit account at a bank or banks that may or may not be affiliated with the broker-dealer;
  • Some programs allow you to “sweep” funds to one or more money market mutual funds; or
  • You may simply leave uninvested funds in the brokerage account.

Your brokerage firm may not offer all of these options for your uninvested cash. For example, some brokerage firms will “sweep” your uninvested cash into a bank.  Each of these cash management programs offer different benefits and risks, including different interest rates and insurance coverage (FDIC or SIPC).  Your brokerage firm may have a financial incentive to use one sweep program over another. The terms and conditions of these cash management programs vary between brokerage firms. Make sure you understand and carefully consider the available options, benefits and risks associated with each cash management program before selecting one for your uninvested cash.

  • How do you want to receive your account statements and confirmations? 

Brokers generally are required to provide you with account statements and confirmations. You have the choice of whether to receive account statements and transaction confirmations on paper or electronically. Account statements and confirmations help to protect you. When you receive account statements and confirmations, you should always verify that the information in them is correct. If you have questions, spot any errors, or see transactions that you did not make or authorize, contact your brokerage firm immediately by phone and in writing. You may also want to consider whether you want a person whom you trust to receive duplicate account statements and transaction confirmations.

  • Do you want to give your broker-dealer the ability to make decisions for your account in certain circumstances?

In a brokerage account, you will generally make your own investment decisions. In some situations, you may grant temporary or limited “discretionary authority” to a broker to make decisions for you on your account. If you want someone else to have discretionary trading authority on your account, you will need to provide him or her with written legal authorization. Ask your broker for the correct form to fill out. Before granting anyone discretionary authority over any brokerage account, you should carefully consider the risks involved in allowing someone else to make decisions about your money.

Granting a broker discretionary trading authority does not mean that the broker is an investment adviser.  For more information on the differences between the services typically offered by brokers and investment advisers, please see http://www.Investor.gov/CRS.

Understand Your Fees

You will pay a variety of fees in connection with your brokerage account. These fees and their amounts will vary among broker-dealers. Before opening your brokerage account, make sure you understand what fees will apply to your account. Some examples of common fees include:

  • Transaction Costs – These are the costs you will pay when buying or selling securities. Some examples of transaction costs include:
    • Commissions – a fee you pay to the broker-dealer for executing a trade often based on the number of shares traded or the dollar amount of the trade.
    • Markups/Markdowns – an amount to compensate a broker-dealer for sales from/purchases into the broker-dealer’s inventory. When buying or selling from its own inventory, the broker-dealer generally will be compensated by selling the security to you at a price that is higher than the market price (the difference is called a markup), or by buying the security from you at a price that is lower than the market price (the difference is called a markdown).
    • Loads – a sales charge you pay when buying or redeeming some shares in a mutual fund or variable annuity.
  • Account Fees – These are fees you may pay related to certain account activities. Some examples of account fees include:
    • Account Maintenance Fees – a monthly, quarterly, or annual fee that a broker-dealer may charge you for certain brokerage accounts below a certain dollar threshold to keep these accounts open at the brokerage. Account maintenance fees vary among broker-dealers and they do not necessarily apply to all brokerage accounts at a broker-dealer.
    • Inactivity Fees – a fee that a broker-dealer may assess on your brokerage account if you have made few or no transactions for a period of time.
    • Account Closing Fee – a fee that a broker-dealer may charge you when you close your account.
    • Margin Interest – the interest that a broker-dealer may charge you for loans from your margin account.
    • Wire or Transfer Fees – fees a broker-dealer may charge you to wire money from your brokerage account or to transfer assets or cash to another broker-dealer.

In addition to fees associated with your account, you will likely have additional fees in connection with certain investments, such as mutual funds, ETFs and variable annuities.

For additional information on fees associated with brokerage accounts and investments, please read our Investor Bulletin How Fees and Expenses Affect Your Investment Portfolio. For information on fees associated with a specific brokerage firm, please remember to read the firm’s relationship summary.

A Note About Transferring Securities to a New Account

When you move an existing account, in addition to paying fees, you may also find that you cannot transfer certain securities. For example, your new broker-dealer may not accept all of the securities in your old brokerage account. In these circumstances, you may consider leaving these securities with the broker-dealer or selling these securities and transferring cash to your new broker-dealer. You probably will pay a commission or other fees in connection with any securities you sell. Depending on the type of account you held with your former broker-dealer, you may find that there are taxes, penalties or restrictions for selling or moving your securities. For more information on account transfers please read our Investor Bulletin “Transferring Your Investment Account.”

Securities Investor Protection Corporation (SIPC)

If your brokerage firm goes out of business and is a member of the Securities Investor Protection Corporation (SIPC), then your cash and securities held by the brokerage firm may be protected by SIPC coverage up to $500,000, including a $250,000 limit for cash. If a SIPC member becomes insolvent, SIPC will ask a court to appoint a trustee to supervise the firm’s liquidation and to process investors’ claims. SIPC protection applies to most types of securities, such as stocks, bonds, and mutual funds. However, SIPC does not protect you against losses caused by a decline in the market value of your securities, and it does not provide protection for investment contracts not registered with the SEC.  

Federal Deposit Insurance Corporation (FDIC)

The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the United States government that protects the funds depositors place in banks and savings associations.  FDIC insurance covers all deposit accounts at FDIC banks and savings associations, including checking and savings accounts, money market deposit accounts and certificates of deposit.  The standard insurance amount is $250,000 per depositor (i.e., per brokerage customer), per insured bank, for each account ownership category. Cash swept into deposit accounts through a brokerage firm’s bank sweep program is covered by FDIC insurance up to the $250,000 limit per customer at each FDIC-Insured bank that participates in the bank sweep program.  Any cash in these accounts that exceeds the $250,000 limit will not be protected by FDIC insurance.  You can determine how much cash is in your bank sweep accounts from your brokerage account statements or by contacting your brokerage firm. For more information on FDIC deposit insurance, please visit the FDIC’s website at https://www.fdic.gov/resources/deposit-insurance/

Additional Resources

For additional investor education information, see the SEC’s website for individual investors, www.Investor.gov.

For FINRA’s resources related to opening a brokerage account, please read FINRA Investor Insights: Opening a Brokerage Account: Part 1 and Part 2

Call OIEA at 1-800-732-0330, ask a question using this online form, or email us at [email protected].

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This Investor Bulletin represents the views of the staff of the Office of Investor Education and Advocacy. It is not a rule, regulation, or statement of the Securities and Exchange Commission (“Commission”). The Commission has neither approved nor disapproved its content. This Investor Bulletin, like all staff guidance, has no legal force or effect: it does not alter or amend applicable law, and it creates no new or additional obligations for any person.

Source: SEC

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