An investment account is an account that you open to buy or sell stocks, mutual funds, bonds and other securities. Depending on the type of account you open, investment accounts can have varying accumulation and distribution guidelines, tax implications and investment options, so be sure you evaluate all available options.

What are the types of investment accounts?

Before you open an account, you need to know what kind of account you want. There are lots of choices — and understanding the types of accounts available will help you decide which will work best for your investing goals and purpose of the account.

Taxable accounts

Standard investment accounts you open don’t have any special tax features associated with them — the income you earn in them is taxable each year. The main difference in account type has to do with the ownership of the account.

Here are the mail options that you may see listed on account forms:

• Individual
  Owned by one person

• Joint tenants with right of survivorship
  Owned by two or more people; if any of the owners dies, the account passes automatically to the other owners

• Community property
  An account owned by a married couple, in a state that recognizes community property (similar to joint tenancy, but with some differences)

• Trust
  A special account type that you open after writing a legal document called a trust

• The Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act UGMA
  A simple trust account for children

• Margin account
  The above terms describe types of ownership; margin is a feature that can be added to brokerage accounts, that allows you to borrow money to purchase investments. Most investors do not activate margin on their accounts, because of the risks of investing with borrowed money, but all brokerage account applications offer the option.

Retirement accounts: Employer plans

Employer-sponsored retirement plans, such as a 401(k), 403(b), 457(b), SIMPLE IRA or SEP IRA, offer you the opportunity to save for retirement using an account in your name. These types of accounts are opened only through your employer, and typically have a limited list of investment options. All have special tax features that make it easier to save for retirement.

• See also: 401(k)s, 403(b)s 457(b)s, Self-employment

Retirement accounts: IRAs and Roth IRAs

If you have earned income, you may be able to open a self-directed Individual Retirement Arrangement (IRA) account or a Roth IRA, which has slightly different tax features. All IRAs are tax-deferred, which means you don’t pay tax on income earned in them each year. All IRA applications ask you to name at least one beneficiary, who is a person or people that would take over the account if you pass away. IRAs can be opened through a bank, credit union, mutual fund company, brokerage firm, or insurance company, and which to choose depends on what investments you plan to buy.

• See also: IRAs

Other account types

Taxable accounts, retirement plans and IRAs represent the main investment account types you’ll come across. There are many others with special tax advantages or other features unique to the account type. For example, you can save for education costs in tax-advantaged accounts such as Section 529 plan accounts. 

Insurance companies sell annuities, and they come in the form of a contract and aren’t investments, but are considered an account type. Just think of each of these types of account as types of places to put your money. After setting up your accounts, you’ll pick what kind of investments you actually own in them.

Where do I open an investment account?

Once you know what type of account you want to open, the next choice is where to open it. Your three main choices are mutual fund companies, full-service brokers and discount brokerage firms. Which to choose depends most on what exactly it is you want to invest in. When you have more than one alternative, consider the fees associated with each and level of services offered to help make your choice.

• See also: Stocks, Bonds, Mutual Funds, Investment planning

Opening an investment account with any of them is easy. You fill out an application form and send them your money for an initial deposit once you’re ready to begin investing. Once you open your account, you usually can visit a website and log on with your account number and password.

If you have no plans to purchase individual stocks or bonds, and will stick with traditional mutual funds rather than Exchange-Traded Funds (ETFs), opening your account directly through the mutual fund company may be your best choice. To set up an account with a mutual fund company, simply call the company to ask for an account application or go to its website where, in most cases, you'll be able to download an application. Doing it this way avoids fee but it may limit to your options to one single fund family, such as Vanguard, T. Rowe Price or Fidelity.

• See also: Mutual funds

When researching mutual funds, here are some questions to ask mutual fund companies:

• Does the fund you're interested in have loads or any other fees associated with it besides modest annual maintenance fees?
• What is the account minimum — is it lower for IRAs or if you set up an automatic deposit plan?
• Are there IRA account maintenance fees?
• What are the account closing or transfer fees?

Discount brokerage firms

If you plan to purchase individual stocks or bonds, you’ll need to do that through a brokerage account. The lowest-cost alternative is an online discount broker. Once you pick a firm, you can print out the application forms, sign them, enclose them in an envelope with a check to initially fund your account and you'll receive confirmation from the firm that you are all set.

Most people trade using discount brokers because they are a cheaper option than full-service brokers, and typically have lower account minimums. Costs vary according to the firm, but many allow you to buy or sell stocks or ETFs for $10 or less per trade. You don't get much if any investment advice; however, you do get the ability to make trades easily and cheaply — and use various online tools for stock research if you want them.

Independent brokers or full-service brokerage firms

Independent brokers or full-service brokerage firms have higher costs than discount brokers, but you’ll have a live person to speak with who can help you with your investing. The costs and levels of service vary a great deal from firm to firm. An investor who picks his own investments doesn’t typically use a full-service broker, but those who prefer some advice may choose to pay the additional costs in exchange for that help.

How do I compare brokerage firms?

There are two factors to consider when choosing a discount broker: fees and services.

Comparing fees

Before deciding on a brokerage, you need to compare fees:

• Trading fees
  How much do they charge per trade for the securities you plan to purchase? If you only plan to trade once or twice a year, the difference shouldn't matter too much. But if you trade twice a month, the difference between $10 and $25 trades amounts to $360 per year.
  
  Are there fees for trading no-load mutual funds, that wouldn’t apply if you owned the fund directly through the mutual fund company?

• Account minimums
  Is there an account minimum? Is it lower for IRAs? Is it lower if you agree to an automatic deposit plan? If you specifically invest with index funds, this might not be a factor for you. But if you've got just $1,000 to invest, you can cross off any brokerages with minimums higher than that.

• Maintenance fees
  Are there any account maintenance fees (especially IRA fees)? What about account closing or transfer fees? Compare all the fees that you're likely to be charged at any brokerages you're considering.

Comparing services

You also need to compare the services and ask these questions:

• Customer service fees
  All online brokers offer web-based trading, but how much do they charge for services like making trades over the phone?

• Office locations
  Do they have local offices near you — if that's important to you?

• Customer satisfaction
  Do they have a good reputation for customer service? You can assess this for yourself just by calling or emailing each contender and asking any questions you have.

• Account statements
  Are their account statements easy to read? You may be able to view sample statements on their website. If not, perhaps some contenders will fax or mail you samples.

Words to know

Unsure about something you read? Many of the financial terms you came across in this article are defined in our financial glossary. A-Z Glossary

Links we like

Here are a couple online features you might find useful:

• Motley Fool Where to Park Your Cash: www.fool.com/personal-finance/saving/where-to-park-your-cash.aspx
• Securities and Exchange Commission (SEC) Where to Open a Brokerage Account:
  www.sec.gov/answers/openaccount.htm