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.
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.
- Annual income.
- Net worth.
While many people opt for online brokers, you can find an in-person brokerage firm in most 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 annual fee, 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 municipal bonds in a Fidelity account. Additionally, some full-service brokers and robo-advisors charge a management fee that’s a percentage of assets under management. The assets you’re trading also have fees, such as mutual fund transaction fees and expense ratios.
When you’re shopping around for brokerage firms, look for the fee schedule and understand the costs associated with different transactions. No broker charges the same fees for every transaction, so it’s important to have a good understanding before you make your first trade. While you’re at it, compare management 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.
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 generally 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.
Here are the advantages and disadvantages of having multiple accounts.
Benefits
- 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. If you want to invest in alternatives such as real estate or hedge funds, you’ll need to do so through a brokerage account. However, not all accounts will offer a wide variety of alternative investments.
- Investors with higher investment balances might better manage their tax obligations by having multiple accounts.
Drawbacks
- 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. This allows you to buy more securities than your account is currently worth; it’s a form of leverage. But 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 these calls, it’s a good practice to keep a certain percentage of your trade balance, a cash cushion, in your account. 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. When opening a margin account, you’ll also have to pay additional fees, so make sure that you understand the terms of 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. 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.
Brokerage accounts vs. IRAs
While both 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.
With that flexibility comes a downside: taxes. While IRAs offer tax-free or tax-deferred growth on investments, your brokerage account gains are subject to income taxes and possibly capital gains, depending. In other words, if you sell an investment within an IRA, you don’t have to pay capital gains taxes. But if you withdraw money from an IRA, you have to pay taxes on the amount withdrawn, unless it’s a Roth IRA. With a brokerage account, selling investments leads to capital gains taxes, but there’s no taxes on withdrawals.
Bottom line
Brokerage accounts allow you to access your investments more easily than retirement accounts. Just keep taxes and fees in mind when you’re trading. And of course, be sure to do your research before making any investment decisions.
Correction, Feb. 10, 2023, 5:00 pm ET: A previous version of this article incorrectly stated that there was a limit on the number of IRA accounts that could be opened.
