Study: 81% of Americans Don’t Know How to Open an Online Brokerage Account

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by Susan Lyon

NerdWallet found that 4 out of 5 Americans don’t know what type of account to open to start investing – do you?

81.4% of the 844 Americans surveyed incorrectly identified the type of account to open in order to trade stock online.  Only 18.6% of those polled selected the correct answer: a brokerage account.

Instead, a full 27.3% said they didn’t know, and most other respondents selected a variety of wrong answers including:

  • Savings account – 8.2%
  • Certificate of Deposit (CD) account – 2.1%
  • Money market account – 6.2%
  • All of the above – 7.6%
  • None of the above – 13.3%

All of these answers are wrong.  Contrary to what is apparently popular belief, one cannot invest online simply via their regular checking or savings account.  You need a unique type of account to trade online, called an online brokerage account.

Out of those not currently investing, a plurality – 39.3% of those surveyed – had also answered that they do not invest because they lack the money to do so; meanwhile, 13.6% said they were not sure how to get started and 12.8% said they did not invest because they did not want to risk losing money.

These numbers might imply that the high number of uneducated investors is due to a lack of motivation to learn about online investing because they don’t see a need or reason to learn; that said, a subset of Americans simply did not know where to begin.  With many employers offering 401(k) plans and the benefits of IRAs becoming more widely popular among retirement investors, it’s important that more Americans become educated about the basics of investing. This article lays out what you need to know if you’re ready to get started investing today.

Guide: How to Get Started Trading Online

For those looking to sign up right away, NerdWallet reviewed the 3 largest brokerage account providers – Schwab vs. eTrade vs. TD Ameritrade – to give users a sense of which account is best for which type of trader.  For everyone else, a more in depth guide to selecting just the right brokerage is below.

NerdWallet’s step-by-step guide to opening your first online brokerage account to get started investing online.  It helps to calculate your total monthly trading costs before you commit to opening a new account:

1.  Know Your Trading Style

Are you a beginner, a pro, or somewhere in between?  Depending on who you are, the best trading accounts for your needs will differ widely.  If you’re a specialty trader, these are some of NerdWallet’s ‘best of’ picks by category to get you started:

 2. Pick Your Minimum Investment

Some accounts have a minimum account size, below which you are ineligible to invest or might accrue additional fees.  If that’s the case, you’ll need to take your money elsewhere, so know going in exactly how much money you’re planning on investing.

3.  Figure Out Your Total Monthly Trading Costs

While brokerage firms like to advertise low per trade commissions, this is not by far the only number that goes into figuring out what your total costs will be.  You need to take into account any hidden fees and costs that might be buried in the small print.  To help this dull process along, you can plug your initial account balance and your expected number of trades per month into NerdWallet’s free best brokerage comparison tool, and it will do the work for you to sort out your best priced options.

4.  Decide What Research Tools You’ll Actually Use, and How Much Extra You’d Pay For Each

Do you truly think you’ll use the wide variety of research reports, real time data, and analysis software usually offered at the high end, full service brokers?  Some brokers do provide these features, but many do not – or only for an extra cost.  So make sure you aren’t paying extra for them if you don’t plan to utilize them.

5.  Rule Out Any Bells and Whistles

Often, a deep discount brokerage can meet your needs for far cheaper if you don’t need additional services like 24/7 service, broker assisted trades, debit cards, a physical location, mobile access, and all that jazz.  Be sure to examine all your options in order to save money – if you’re just using the account for bare bones buy and sell order placing, you should be trading at one of the lowest prices in the business.

6. Discount Brokers vs. Brand Name Brokers

At least 17 million current account holders could be saving hundreds of dollars a year by using a deep-discount brokerage. Many believe that paying for brand name brokers like Schwab and E-trade, means receiving better trade execution. This is not true – a NerdWallet Investing study uncovered that only 12% of commission fees paid to brand-name brokerage firms are used for trade execution. By contrast, deep discounters like Interactive Brokers and Speed Trader spent an average of 59% on trade execution. Discount brokers and brand-name brokers are both subject to the same regulations: they are all required to be registered with the SEC and FINRA which regulate the investment industry. In addition, trade execution is often outsourced to third party companies that are used by brand-name brokers and discount brokers alike. The takeaway? Don’t rule out discount brokers. They can offer the same service as brand-name brokers, but at a fraction of the price.

Ready to Sign up?

If you know exactly what you’re looking for but aren’t sure who offers it at the best price, try using NerdWallet’s free brokerage comparison tool to identify the best fit at the best price for you.

 

Read More From NerdWallet:

The Best Online Brokers for Stock Trading

NerdWallet’s Best Brokerage Firms

How to be a Trader: Steps For New Investors

 

NASDAQ image courtesy of Shutterstock.

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