Online Investing – Opening Your First Online Account
The commercials on TV make it seem so easy – open your investing account, begin trading that day, and in no time, you’ll be able to retire a millionaire. Well, online investing is easy – but it isn’t quite that easy.
The online companies don’t tell you that there’s an application, and an account approval period that can be rather frustrating for a newcomer to online investing.
The Online Investing Account Application
Common sense tells you that online companies are going to need your name, address, phone number, etc., but you might be surprised at just how much information they do need to know.
For example, they’ll need your birth date, social security number, employment information, liquid net worth, total net worth, annual income, tax bracket, and much more.
Why do these online investing companies need so much information? One reason is that they are required by law to verify your identity. Following the events of 9/11 and the passage of the Patriot Act, the government has called upon financial service companies to help stem the flow of money to terrorist groups.
In practice, this is nothing but a big hassle for the 99.99+ percent of people engaged in investing who have nothing to do with terrorism. It depends on your political persuasion as to whether or not it’s all worth it.
Regardless of your political views, the fact is that the Patriot Act is the law, and because of it online investing companies will go to great lengths to verify your identity. For example, if you’re a married woman who has recently taken her husband’s surname, investing companies might delay the approval of your account.
You will have to prove to them beyond a shadow of a doubt that you are who you say you are, and this is sometimes more difficult than you would presume.
Different Levels of Authorization For Online Investing Accounts
Did you know that your credit history comes into play when you want to open an online account? This is because some forms of investing pose a financial risk to online investing companies. For example, when you buy on margin, you are borrowing money to buy stock.
If you have less than stellar credit, online companies may deny you the use of margin. Furthermore, shorting stocks (selling stocks which you don’t own in the hope that they will decline in value, and then buying them back at a later date) also poses risk for online investing companies.
What happens if you short 100 shares of a stock that’s trading at $ 40 and it goes to $ 200? Do you have $ 200,000 to buy back the stock? If not, then the investing company loses, so if you have poor credit or limited liquid net worth, you may be denied the right to sell short.
More troubling is the idea that online investing companies can limit you from doing things that don’t directly pose financial risks to them. For example, buying call and put options poses no risk to an online broker, but the company may still deny you the right to buy options on the grounds that you lack experience.
Why should the online company care? Because theoretically, you could sue them for not protecting you from yourself – blame the trial lawyers for this one.
Don’t Be Scared Off
The vast majority of people who want to open online accounts are able to do so with relatively little trouble. Some people, however, get a lot more of a hassle than they bargain for. T
he important thing is to be prepared to disclose a lot of information, and to wait while your account application is being processed. The more you know going into the situation, the less frustrating it will be.