Investing for beginners might seem expensive. After all, how many people can afford the asking price of $700 for a single share of Amazon or Google stock? In reality, investing has never been more affordable. Not looking at the share prices of individual stocks or mutual funds, the costs of opening a brokerage or retirement account are the most affordable in recent memory. Online investing is a highly competitive field and the various brokerages are constantly trying to reduce their account minimums and fees to attract new customers.
Many financial advisors will recommend investing a certain percentage of your income for savings and retirement. If you cannot invest the recommended amount of 10% of your income, for example, even investing 1% is better than nothing. If you diligently invest any amount of money, it can earn more than sitting in a bank account.
Do You Want A Brokerage Account, Retirement Account, or Both?
The first decision you need to make is to decide why you want to invest. If you want to invest but still have your money accessible to withdraw, you will want to open a brokerage account. Saving for your retirement might be priority #1, as long as you do not intend to touch the money until you are at least 59 ½ years old, a traditional IRA (Individual Retirement Account) or ROTH IRA will best suits your needs because of their tax benefits.
Ideally you will want to open both types of accounts as soon as possible. For beginners, a taxable brokerage account might be the best option. Especially you already contribute to a 401(k) plan at work. Although your gains are taxed each year, the money is available for you to use if necessary. With savings account interest rates so low, investing is the only realistic way for many people to earn passive income. In case you need to make a major purchase but do not want to apply for a loan, you can sell an investment to make the payment.
Selecting A Brokerage
By knowing the type of account you want to open & how much money you have available to invest, will make the decision of choosing a brokerage easier. If you are still undecided on what type of account to open, comparing brokerage fees & account minimums might help you out.
There are two different types of online brokerages. Full-Services brokerages (i.e. Charles Schwab, Fidelity, Vanguard) tend to charge higher transactions fees & require higher account minimums but typically offer better customer service and research tools available. Discount brokers (i.e. Trade King & OptionsHouse), charge lower fees, have less research tools available, and only offer taxable brokerage accounts. They are primarily designed for frequent traders who might research elsewhere, but regular investors can use them as well.
If you are looking for an online broker that has extensive research tools with third-party reports from firms like Morningstar, Argus, and Standard & Poor’s, in addition to a trading platform, a full-service broker like Charles Schwab, Fidelity, or TD Ameritrade, is the best option for you.
Maybe you already know what stocks, mutual funds, or ETFs you want to buy. Or you research potential investments elsewhere. Discount brokers do provide some limited research on individual stocks and funds, but do not provide an in-depth analysis like full-service brokerages offer.
For those not wanting to self-invest, the option of walking into a physical branch office and talking to a broker is still available with full-service brokerages and both types of brokerages offer managed portfolios (the online equivalent of hiring an in-person broker). Both options obviously cost more & require higher account minimums.
Account Fees & Minimums
When considering a broker, fees & account minimums might be a big deal.
Here are a couple different items to consider:
- Account Minimums
- Account minimums vary widely broker to broker. For example, Fidelity requires $2,500 to open a brokerage but nothing for a retirement account, but Charles Schwab requires $1,000 to open either account. A discount broker like TradeKing requires $0 to open a brokerage account, but will charge an inactivity fee if no trades are made within 12 months & the total account assets are less than $2,500.
- Minimum balances might be waived if you schedule an automatic monthly transfer into the account. For example, an automatic deposit of $100 on the first of every month means you do not need the initial $1,000 to open the account.
- Transaction Fees
- The first fee you will see advertised for any company is the cost to buy or sell a stock or ETF. It’s a flat fee whether you buy/see one share or 1,538 shares. The fee for discount brokerages is around $4.95 per trade while the full-service brokerages charge anywhere $6.95 to $10 per trade.
- For mutual funds, brokerages offer a wide selection of no-load, no-fee funds. Prices for mutual funds outside the list can range from $19.95 to $60 depending on the brokerage.
- Inactivity Fees
- Discount brokers are more likely to charge this fee if you do not make so many trades within a particular time frame. The fees might be waived if you have a sufficient account balance, etc.
How Much Does It Cost To Invest In Mutual Funds?
Mutual funds can be a great option for new investors because they are historically less risky than individual stocks because they invest in hundreds of companies of a particular size or sector. But, a “hidden” cost when investing in mutual funds, is the minimum initial and subsequent investments. These minimums are expressed in dollar amounts, such as at least $1,000 for the initial investment for “Mutual Fund A” & at least $100 for any future investments.
Most brokerages require lower investment minimums for their own mutual funds. For example, Charles Schwab requires a $100 initial investment and only $1 for most of the Schwab mutual funds. If a Schwab investor wants to invest in a non-Schwab fund that isn’t on the Select list (hypothetical purposes only), they might have to invest at least $5,000 initially and at least $1,000 for every future investment for that fund. Each brokerage requires different minimums for their own funds & external mutual funds. If you have a certain family of mutual funds in mind that you want to invest in, it might be a financially wise decision to see if the funds are available through your prospective broker and the minimum investment thresholds.
How Much Money Do You Need?
If you are not picky about what brokerage you choose to trade with, especially for stocks & ETFs, you can open an account with no money down. You only need enough to cover the cost of the transaction fee and per-share asking price of each stock. To buy 100 shares of a stock selling for $10 per share, you would only need $1,000 to buy the stock plus at least $4.95 for the transaction fee.
But, if you select a brokerage that requires a minimum account balance of $2,500, you will need to buy an additional $1,500 worth of that same stock. Depending on your budget, this additional cost might compel you to choose a different broker.
Making your first trade will only cost as much as the minimum initial account balance. You can contribute a larger amount to buy more of the same stock or diversify and buy several stocks or mutual funds. To keep the momentum going, consider automatic investing. Automatic investing encourages all investors to continually invest, without the temptation of trying to time the market or only investing when you can make a “large” investment.
Routine investing allows you to capitalize on the magic of compound investing. Think of it like a snowball. Even if you only automatically invest $100 a month, your balance will start small but will gradually increase in size. After one year, that is $1,200. Ten years later, that is $12,000 plus the gains from your investments.