- 1c. Opening a Self-Directed Account
You might be thinking, “This all seems too complicated and uncomfortable.” This is a common reaction but one that is easily remedied. Letʼs walk through the process of opening a self-directed account.
- Make sure you have some money saved that can be used for investment purposes.
- Conduct an Internet search for “self-directed brokerage account.” Compare the options among several of the companies listed and then select the firm that has a low minimum account balance, low (or no) trading commissions, and low (or no) account fees.
- Check that the firm offers Securities Investor Protection Corporation (SIPC) insurance, which protects your account up to $500,000 per customer, per firm, with up to a $250,000 limit for cash. SIPC covers you in the event that the brokerage firm goes out of business or experiences theft. Keep in mind that SIPC does not insure against losses in the markets.
- Open the account. You can begin buying and selling securities almost immediately.
You will always want to make sure that you already have some savings set aside for emergencies and other short-term goals.
2. Placing Orders
- 2a. Types of Orders
When you make your first stock purchase, you will be asked how you want your purchase to be handled. You have three basic choices, as shown in the following illustration.
Market order, which instructs the brokerage firm to buy (or sell) at the current ask or bid price. This is the fastest way to transact trades in an account. However, a market order does not guarantee the buy or sell price because sudden market swings can alter the price.
Limit order, which tells the brokerage firm to only buy (or sell) at a specific price or better. Letʼs say you want to buy shares in a company only if the price drops below $25 per share. The limit order will stay in effect until the price drops under $25. It is important to use limit orders when you are buying or selling stock that does not have many buyers and sellers, or if you are trading a stock with large daily price swings (see Hint below).
Stop order (sometimes known as a stop-loss order), which directs the brokerage firm to buy (or sell) only when the price falls below a set point, say, $24.50. If the stock price jumps down from $25 to $22, then the stock will sell at the next available price ($22) even though the order was set at $24.50. In some situations, a stop-loss order will require the stock price to trade at an exact amount for it to be sold.
By using limit orders, you are able to protect yourself against sudden price swings in the market price.
Some investors also use a buy stop or sell stop order. A buy stop sets a limit on how much you are willing to pay, whereas a sell stop instructs the brokerage firm to sell shares if the price falls.
- Market Order
- Instructs a brokerage firm to buy (or sell) at the current market value; the fastest way to transact trades in an account.
- Limit Order
- Tells the brokerage firm to only buy (or sell) at a specific price or better.
- Stop Order
- Directs the brokerage firm to buy (or sell) only when the price falls below a set point. Sometimes known as a stop-loss order.
- 2b. Online Orders
In todayʼs highly technical world, most brokerage account activity is handled online.
- Years ago, you would have received a stock certificate, which is paper proof of ownership, whenever you purchased shares of stock.
- Although you can still receive a certificate, nearly all brokerage firms require that you hold shares of stock in street name. This refers to the brokerage firm being shown as the owner of record even though you, as the brokerage account client, actually own the shares.
- Street-name ownership allows for quicker and simpler transactions.
3. Reading a Brokerage Statement
Once your account is set up, you will begin to receive account statements, like the one shown in the following illustration (see Hint). Looking at TJʼs account in the illustration, you can see that she withdrew $1,000 from the account, earned $50 in interest, and paid a $30 account fee. TJʼs investments also increased by $300 during the month.
Similar to your bank account, it is important to review your brokerage account statement monthly.
In this lesson, you went through an overview of brokerage accounts. When you choose a brokerage account, you should compare the features of self-directed and full-service accounts. With a self-directed account, you’ll make your own investment decisions. You will need to use your productivity skill to make sure you are on top of things. If you open a self-directed account, be sure the firm offers SIPC insurance. Conversely, full-service brokerage firms will match you with a broker who can help you interpret and read your brokerage statements.
When you’re ready to place an order for stocks, you’ll select from three types of orders: a market order, a limit order, or a stop order. With the advent of the Internet, most orders today are placed as online orders.
Source: This content has been adapted from Chapter 8.8 of Introduction to Personal Finance: Beginning Your Financial Journey. Copyright © 2019 John Wiley & Sons, Inc. All rights reserved. Used by arrangement with John Wiley & Sons, Inc.
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