How Does an Online Brokerage Account Work?

A brokerage account is a financial account similar in function to the accounts you have with a bank. With a brokerage account, you deposit funds with an investment firm (the brokerage). This is usually done by a transfer from your existing bank account. Once funds are added to your brokerage account, you can put the money to work using the brokerage's trading platform to invest those funds in the market. The assets you buy with your cash can be anything offered by that brokerage, including stocks, bonds, ETFs, and even cryptocurrency.

How Much Money Do You Need To Start Investing?

You can start investing with any amount. Many brokers offer accounts with no required minimums and access to fractional shares. If you don't have a lot of money to invest, it will influence how you approach the market. Although you could invest $1 in fractional shares of a specific stock, the better approach with limited capital is to invest in exchange traded funds (ETFs). Index-tracking ETFs, for example, offer greater diversification for your dollar than a single company's stock because every share (and fractional share) of the ETF replicates an index made up of many companies in many different industries. Options are another way to leverage your dollars with a directional bet on the market or a specific stock, but this is a strategy best reserved for risk capital—not the whole of your limited investment capital.

Can You Lose Money in a Brokerage Account?

Yes, you can. It is a reality of the market that no reward comes without risk. You can lose money buying a bad investment, but you can also lose by buying a good investment at the wrong time. When it comes to the financial markets, there are endless possibilities for making and losing money. Unless all the funds in your brokerage account are sitting in uninvested cash, there is a risk you will lose money. Another way of looking at that, however, is that a brokerage account sitting full of uninvested cash isn't at risk of making any money either. You can use strategies like asset allocation and diversification to reduce the risk of you losing money, but you will never fully eliminate it without also eliminating your chances of making a decent return.

What the Difference Between Investing and Trading?

Investing and trading are two very different methods of attempting to profit in the financial markets. Both investors and traders seek profits through market participation. In general, investors seek larger returns over an extended period through buying and holding. Traders, by contrast, take advantage of both rising and falling markets to enter and exit positions over a shorter time frame, taking smaller, more frequent profits.

How Do You Open an Online Brokerage Account?

First, you'll want to make sure your online broker offers the types of securities you want to invest in. Do your homework. A reputable online broker will be registered to sell securities. You'll also want to make sure your investments are safe. Platform security should be paramount, and you'll need a broker that offers multiple layers of security for your investments. Two-factor authentication is something to look for, as are SMS/email login notifications. You'll want to know if anyone is trying to gain access to your brokerage account. Check out the fees and commissions your broker charges. Commissions add up fast, so this is important. Many online brokers make money through a wider spread between the bid and ask price. And you'll want to know if your broker has a minimum investment requirement. If you don't meet a broker's minimum investment requirements, you'll need to find one that will work for you. Once you've found an online broker that works for you, set up an account and fund it from your connected bank account. Then you can start choosing from your new broker's available securities.

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