How to start investing

Video how to open an account with fidelity investments

Step 2: Choose an account type

What you’re investing for can also help you pick an account to open. Chances are, you’ll want to start investing with one of these 3 main account types:

Brokerage account: When people talk about trading stocks, they’re typically talking about doing so in a brokerage account. You can think of a brokerage account as your standard-issue investment account. Here are the basics:

  • Pros—Flexibility. Anyone age 18 or older can open one.1 You can add as much money as you want to the account, whenever you want, and have access to a wide range of investment options. You can also generally withdraw any cash in the account whenever you want.
  • Cons—Taxes. While a brokerage account may be the simplest to open and start using, it’s typically the most expensive come tax time. That’s because you generally have to pay taxes on any investment profits every year (like if you’ve sold investments for a gain, or received dividends or interest).
  • When to consider. Most commonly used for investing and trading the full range of investment options for either specific goals or just building wealth as you’re accumulating assets. If you’re investing for retirement, it generally makes more sense to first start with one of the next 2 account types. That said, as long as you choose an account with no fees or minimums, there’s no harm in going ahead and opening a brokerage account so you have it at the ready. (Fidelity charges $0 account fees and has no minimums for opening or maintaining a brokerage account.)2
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401(k): This is an employer-sponsored plan account for investing for retirement. You can generally only invest in one through work. If you’re not sure if you have access to one, check with your employer’s HR department. Some people may instead have access to a 403(b) or 457(b) account, which are similar. Here are the tradeoffs:

  • Pros—Tax benefits, plus potentially free money. 401(k) plans offer tax-deferred investment growth. This means that you can contribute to the account pre-tax, and you generally don’t pay any taxes while your money is sitting in the account potentially growing. Instead, you only pay income taxes when you take withdrawals (learn more about the benefits). Many employers will also match your contributions, up to a certain amount—it’s like free money to encourage you to contribute. Your 401(K) may offer a Roth option as well. Here, you contribute after-tax but withdrawals are generally income tax-free.
  • Cons—Rules and restrictions. There are rules to follow on when and how you can contribute, and strict rules on when and how you can take money out. You may also be limited in what investments you can buy, and you can’t necessarily buy specific stocks.
  • When to consider. For most people, the benefits easily outweigh the drawbacks. Many people start investing for the first time in these accounts. Chances are that if your employer offers a 401(k) or similar account, it’s worth your while to invest in yours.

Individual retirement account (IRA): This is an account for retirement that you can open and invest in on your own (i.e., not through work). Although there are different types of IRAs, here we’re focusing on traditional IRAs, which you can think of as the plain-vanilla kind. Here’s what you need to know:

  • Pros—Tax benefits. Traditional IRAs come with similar tax benefits as 401(k)s. You also often get a bit more flexibility and control than you do with a 401(k). For example, you can pretty much contribute whenever you feel like it, and you may have more investment choices. You can typically even trade individual stocks.
  • Cons—Rules and restrictions. There are rules and restrictions on who’s eligible to contribute to an IRA, how much you can contribute each year, and how and when you can take money out. Also, if you do decide to open an IRA, you may have to spend some time deciding which type of IRA to open.
  • When to consider. An IRA may be a good choice if you don’t have a 401(k) or similar option at work. A traditional IRA, in particular, may be a good option if you expect to be in a lower tax bracket when you retire.
  • Roth IRAs may be a good choice for new investors and we can help you choose between the two in the account selector.
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Still with us? You’re doing great. And the next step is simpler—promise.