What is an Investment Account? A Beginner's Guide

So, you've built up an impressive balance in your savings account and you're thinking, "I really wish that money were earning a little more interest. I wonder what else I could do with it?" The simple answer is: invest it. However, knowing where to start can be totally overwhelming. With online brokers, banks and mutual fund companies all competing for your attention, how do you choose? Let's explore some of the common options.

One popular way to invest is to open an IRA, or individual retirement account. These are a great tax-advantaged way to save for retirement. However, once you put money inside an IRA, it's inaccessible until you reach retirement age (there are a few exceptions to this rule - for more information, see "What is an IRA?"). However, what if you don't want to lock your money away until you're 59.5? What if you want to invest, but still have access to the money at any time? In that case, what you need is a taxable investment account, also known as a taxable brokerage account. There's absolutely nothing special about this account - no yearly limits, no tax advantages. The only real difference between this account and a savings account is where you open it and what you do with the money inside of it.

Whether you're going for an IRA or a taxable account (or both), the first question you should ask yourself is "what do I want to invest in?" If you don't know, you should first read the articles in this series about stocks, bonds and mutual funds. If you have a pretty good idea of what you want to invest in, read on. Most novice investors stick to mutual funds, which are a great choice. They're the easiest way to develop a well-balanced asset allocation and are generally less risky than single stocks.

Mutual funds (and stocks) can be purchased through investment accounts at any number of institutions. Online brokerages like E-trade and Sharebuilder offer access to both, as do full-service brokers and mutual fund companies. However, if you're buying mutual funds, your best bet is to open an account with the company whose funds you're interested in. Why? Because if you open an account with a mutual fund company, you can almost always buy their funds with no transaction fees. That is a huge advantage over online brokerages, which generally charge a fee for each purchase. If you're just getting started with a small amount or buying just a few shares monthly, those fees can really add up and cut into your returns. If you want to buy several funds from different companies, open an account at each.

If you want to buy single stocks or bonds, you can usually do that through an account at a mutual fund company, although there will probably be fees involved. In this case, a low-cost broker like Sharebuilder might not be a bad idea. Also, banks like Wells Fargo and others are now offering brokerage accounts with free trades to customers who have a high account balance, so if you have a big chunk of money to play with, this type of account is an excellent choice.

Now that you know what your investment account options are, it's time to figure out what to put in them. Check out the series introduction for links to two more articles ("What are Asset Classes?" and "What is an Asset Allocation?") as soon as they're published.