A brokerage account is a type of financial account that allows you to trade investments. With a brokerage account, you can buy and sell assets such as stocks, bonds, mutual funds, CDs and ETFs. Unlike many retirement investment accounts, you can add or withdraw your money at any time without penalties or restrictions.
These days, opening a brokerage account can take minutes. From app-based brokerage accounts to full-service brokerage firms, there’s something for everyone.
We’ll take you through the ins and outs of this type of account and how to open one.
What can I invest in with a brokerage account?
With a brokerage account, you can access stocks and other types of investments such as index funds, bonds, mutual funds, public REITs and ETFs. Some brokerage accounts even allow you to invest in other more obscure assets such as futures, foreign currency and cryptocurrency.
What are the benefits of a brokerage account?
For starters, a brokerage account allows you an opportunity to invest in the market, and investing is one of the most popular avenues to wealth-building. A brokerage account gives you access to a variety of investments and tools for long-term growth. You own the money and investments in the account and can sell them at any time. Unlike some accounts such as IRAs, covered below, you can access your money at any time and invest as much as you’d like.
How do I open a brokerage account?
Setting up a brokerage account is simple, and you can typically complete an application online in minutes. Have the following information handy when it comes time to apply:
Personal information such as name, address and phone number
Social Security number
Driver’s license number or passport
Bank account number to transfer money into the account
While many people opt for online brokers, you can find an in-person brokerage firm in many cities, if you prefer.
What fees should I watch for when opening a brokerage account?
Brokerage accounts come with a number of fees. For instance, the broker may charge an inactivity fee, fees for research and data subscriptions and trade commissions. It doesn’t stop there, unfortunately. While many stock and ETF trades from online brokers now have zero commission, some transactions can have fees, such as trading bonds.
Additionally, some full-service brokers and robo-advisors charge a management fee that’s a percentage of assets under management. Some of the assets you’re trading also have fees, such as mutual fund transaction fees and expense ratios. The good news is that you can avoid many of these fees if you work with one of the best brokers or best robo-advisors.
When you’re shopping around for brokerage firms, look for the fee schedule and understand the costs associated with different transactions. It’s important to have a good understanding before you make your first trade. If you’re using a robo-advisor or other advisor that charges management fees, be sure to compare those fees, as these can also vary widely between firms.
You’ll also want to compare account minimums between brokers. Some brokers will have higher minimums, but it’s possible to find a broker that doesn’t have any minimums at all, including many online brokerages. While there might be no minimum deposit requirement, there may be minimums to make certain investments such as mutual funds. But many brokers offer the ability to buy fractional shares, allowing clients to trade with almost any amount of money.
Note that some brokers offer robo-advisors in addition to traditional brokerage accounts. With a robo-advisor, you can access low-cost investments — typically ETFs — and other benefits, such as professional management, without paying much in fees. A robo-advisor can be a better option for investors who don’t have extensive experience in the market.
Can I have multiple brokerage accounts?
Yes. You can have multiple brokerage accounts with the same brokerage or with several firms. For instance, you can set up multiple investment accounts with a single brokerage, such as a Roth IRA, traditional IRA, joint account and your own individual account.
Keep in mind that you’ll have to report investment earnings on your taxes, and that IRAs have annual contribution limits.
If you’re setting one account up for retirement and another for a child’s college education, you can ensure that you’re investing with each account’s goal in mind.
You can gain exposure to certain types of investments. Not all brokerage accounts offer all kinds of investments, especially more obscure securities.
By having multiple accounts with different brokers, you can get access to the best of each broker, such as good research at one broker while another has attractive margin rates or a better promotion for new accounts.
It can be difficult to track your overall asset allocation. If you’ve spread your money across multiple accounts, each with a different goal, you might have a hard time keeping track of your overall allocation and whether it aligns with your investment strategy.
You might have to pay additional fees. If you have multiple accounts, you might have to pay extra fees for things like account maintenance, and that can add up.
You’ll have to manage multiple accounts. You’ll need to log in to each account and monitor activity, which can become cumbersome.
Types of brokerage accounts
1. Cash account
If you are new to trading, a cash account is the best place to start. A cash account requires you to pay for the securities you purchase in full, which means that you can’t buy any more securities than you can afford. This type of brokerage account can be a good option for beginner traders, who may not be able to accurately predict the market’s performance. A cash account can help investors avoid taking on more risk than they can afford and prevent them from losing more than their initial investment.
2. Margin account
A margin account offers you a bit more flexibility, as you can use your securities as collateral to borrow money from your broker. A margin account allows you to buy more securities than your account is currently worth, and you’ll need to pay interest on any borrowed money. A margin account can be a great way to increase your purchasing power, but it can be dangerous if you’re not aware of the risks involved and don’t know what to expect.
If your securities drop in value and you’re unable to cover your borrowed debt, the broker can cover it for you by selling off some of your securities, a process known as a “margin call.” To avoid a margin call, it’s a good practice to keep a certain percentage of your trade balance, a cash cushion, in your account.
Most first-time investors should avoid margin trading, as it’s not only more complicated than straightforward investing, it can be highly risky.
What is the difference between a brokerage account and a bank account?
A brokerage account allows you to invest in stocks and other securities, while a bank account allows you to store money and earn interest via high-yield savings accounts or CDs. With a bank account, you can also often write checks or use a debit card. Brokerage accounts are not insured in the same way as bank accounts, but they usually come with SIPC protection. Bank accounts are usually FDIC-insured for up to $250,000 per person per account type.
Brokerage accounts vs. IRAs
While both brokerage accounts and IRAs offer financial advantages and can help boost retirement savings, brokerage accounts are more flexible than IRAs. You can contribute as much as you want and enjoy earnings whenever you choose, unlike IRAs. IRAs have strict contribution limits and penalties for early withdrawal.
Other key differences include the following:
Taxes: Your brokerage account gains are subject to income taxes and possibly capital gains taxes if you sell a security for a profit. In contrast, if you sell an investment within an IRA, you don’t have to pay capital gains taxes, since IRAs offer tax-free or tax-deferred growth on your investments.
Withdrawals: If you withdraw money from an IRA, you have to pay taxes on the amount withdrawn, unless it’s a Roth IRA. And you may have to pay bonus penalties if you withdraw money before retirement age (59 ½ or older). With a brokerage account, selling investments leads to capital gains taxes, but there’s no taxes on withdrawals.
Brokerage accounts give you access to more kinds of investable assets than a bank account, giving you the ability to own investments that appreciate faster than traditional bank products. But unlike the relative safety of bank investments, you can also lose substantial money in a brokerage account if you don’t understand what you’re investing in.