by Dana George | Published on Sept. 15, 2021
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Think you're too old to open a brokerage account? Think again.
Whether you're young or not so young, employed or retired, it's never too late to open a brokerage account. If you put off saving for retirement when you were younger because it seemed too far in the future to worry about, now's the time to get started. If life has thrown you one curveball after another and you've never been in a position to invest, today is your day.
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A brokerage account is an account that allows you to buy and sell investments. These can include stocks, bonds, REITs, mutual funds, and exchange-traded funds (known as ETFs). You set up an account through a brokerage firm, which is a middle man of sorts between you and the companies you are investing in.
Let's say you want to own stock in a specific company. Rather than purchase stock directly from that business, the brokerage firm would make the purchase on your behalf. You put money in your account and choose your investment, and they handle the purchase.
Before you jump into investing, here are four things to know about money invested in a brokerage account.
It is possible to lose your investment because brokerage accounts are not FDIC insured. That said, investing is one of the surest ways to make money in the end -- as long as you're smart about it. Diversification is key. As much as you like a particular company, you don't want to put all your financial eggs into a single basket. Increasing the number of companies you invest in -- and spreading out the types of investments you make (for example, stocks vs. bonds) -- might reduce your risk of loss.
Say you invest in several companies, then one of them hits a rough patch, and the value of its stock tumbles. It's not a catastrophe. In fact, if it appears the rough patch is temporary, buying more of that stock while the price is low may leave you sitting pretty. In the meantime, as one (or two) of your investments struggle, you have other investments to pick up the slack.
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Even if you're near retirement, it helps to know that -- like any long-term relationship -- no two days will be the same with your investments. Some days things will be great, and some will make you wonder why you ever got involved. The thing about investments in the U.S., though, is that they have a pretty great track record. Investments have done extraordinarily well over the past couple of years, but even when we look into historical records, we can see investing has paid off big.
The S&P 500 is a stock market index that tracks the performance of 500 large companies and serves as a good barometer of how the market is doing. Between 1957 and 2020, the average annual return on stocks was around 11%. Between 2011 and 2020, the return was 14.5%. There have been up years and down years, but on average, investors have steadily grown their money at a much higher rate than they could hope to earn from a savings or money market account.
Let's say you invest $5,000 in a brokerage account and earn 10% interest each year. After one year, you've earned $500 in interest. There is now $5,500 in your brokerage account, and you begin earning interest on the interest you've already earned. The following year, you've earned another $550 in interest, and your balance has grown to $6,050 -- and so on. That's compound interest. As long as you don't panic and withdraw funds any time an investment hits a bump in the road, compound interest helps your investment grow over time.
Let's say you're on a tight budget but can manage an extra $100 per month to invest. No amount is too small. While some brokerages require a minimum deposit that may be outside your budget, there are plenty of online brokers offering accounts with no minimum deposit. No matter how much or how little you have to get started, the trick is to jump in.
Being a new investor doesn't have to be intimidating. Getting started is easy and you can develop your investing skills on your own schedule. Here are the first steps to take.
Everyone has a different reason for opening a brokerage account. Some people want to save for retirement or to buy a house. Others just want to let their money grow, knowing they can draw from the funds down the road. Your personal goals will ultimately help you decide which brokerage is right for you.
Once you have decided on a brokerage, fill out an application. The process is simple, and brokerages typically ask only for the information they are required to have on hand.
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Typically, you'll link your bank account to the new brokerage account. It's important to note that the brokerage will never access your bank account. The only reason for the link is to simplify the process of transferring money when you decide it's time to do so.
Most brokerages offer awesome videos and research materials that you can work through at your own pace, and some have representatives who are happy to answer questions.
For more in-depth information on getting started, check out our step-by-step guide to opening a brokerage account.
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