Become a better investor
Lesson in Course: Investing basics (beginner, 3min )
What is a brokerage account and why do we need one to start investing?
About 80% of people give up on their New Year’s Resolution. Forming a new habit or changing a routine is difficult, especially if it’s something we haven’t done before. Fancy scientists blame this issue on inertia, a tendency to do nothing or resist change. Inertia is why it takes more effort to get started than it takes to keep it going.
The same is true with investing for the first time, but here is a dead-simple plan to get started.
We have to open an account at a brokerage before we can start investing. Most brokerages offer traditional brokerage accounts and retirement accounts. If we already have our retirement accounts set up, we should consider opening a traditional brokerage account to invest our after-tax money. A brokerage is a middleman that connects us with other investors in the market to buy and sell assets. Brokerage accounts come in two flavors.
Cash accounts are a type of brokerage account that only allows us to make purchases with the money we have in the account.
Cash accounts are straightforward and simple and we will never end up borrowing or owing anyone money. Since we’re just getting started, a cash account will keep things simple until we’re ready for a margin account. Some cash accounts also come with free checking and debit services linked to the brokerage account.
As beginners, we need to keep our eyes peeled since margin accounts are often advertised by brokerages. When we sign up for brokerage accounts, brokers will often recommend these or by default open these for us—these accounts generate more revenue since the brokerage earns interest for the money lent.
Margin accounts allow us to borrow money from our brokerage against the value of our investments.
While investing with more money sounds enticing, trading on margin can be dangerous for beginners. Brokerages make it easy to trade with borrowed money; however if our investments start losing value, the brokerages come looking for more collateral. The effect of borrowing money to invest is called leverage and leverage can potentially amplify gains as well as losses we incur.
Margin accounts are reserved for more advanced investors who understand the amount of risk they are holding at any time. If we found out that we ended up signing up for a margin account, we need to be careful not to invest with more money than we have.
Knowing how much time we can set aside to manage our investments helps determine whether we will start with an unmanaged or managed brokerage account. These accounts are not mutually exclusive, and many investors often end up having both at one point.
Unmanaged accounts allow us to take the wheel to pick and execute which investments we want to make.
With an unmanaged account, we save on advisor fees and maintain control over what assets and companies we are investing in by doing things ourselves. However, we are also on the hook to learn and understand what we are doing—Archimedes is here to help you with that goal. Once we open our account, the lesson on passive investing will cover a basic investment strategy that is simple and quick to implement for beginners.
If we are super busy and want someone to take care of it all for us, we should look for managed accounts.
With managed accounts, we will pay a fee for someone, a human advisor or a computer, to manage our investments for us. Typically, advisors are going to charge more in fees than automated software services. The difference is that advisors can prescribe a custom strategy, while a Robo-advisor saves money by matching our needs to a few preset strategies.
Let's take the first step of investing by choosing to open a managed account or unmanaged account. The lesson about picking a brokerage account walks through how to choose one that fits our needs.