What is a Brokerage Account? – Defined & Explained

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Key Takeaways
  • A brokerage account involves buying and selling exchange-traded funds (ETFs), mutual funds, stocks and bonds.
  • Brokerage accounts allow for a greater level of flexibility than savings accounts.
  • The three main types of brokerage accounts are cash, joint and margin.
  • Investors can choose their specific broker by researching criteria such as reputation, fees, full-service amenities, investment management style, tax benefits and brokerage types.
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Brokerage Account Definition

A brokerage account is an investment account that lets individuals trade stocks, bonds, ETFs, and mutual funds. It helps a person who is putting money aside to invest, saving for a big purchase or expanding their portfolio.

It is also known as a stock broker account. A stock broker account helps beginner investors save money, invest wisely, plan their retirement and keep their finances in check.

Understanding the different types of brokerage accounts helps investors monitor their financial standing.

How Does a Brokerage Account Work?

how a brokerage account works

Increased ownership of personal computers and access to online investments have paved the way for the future of brokerage accounts.

Since the 1990s, online brokerages have allowed individual investors to secure or invest their money using a personal desktop, laptop or phone.

A brokerage account works for individual investors by allowing more flexibility and investment possibilities than typical savings accounts.

A brokerage account has the benefit of long-term potential by holding investments for more than a year. This helps an investor obtain a high tax bracket and yield bigger capital gains.

The overall structure of a stock broker account allows investors to access stocks, mutual funds, ETFs, and other types of investments to build their portfolios.

A brokerage account allows individuals to buy and sell securities, secure long-term investments and save money for long-term goals. In addition, it gives you access to research tools and investment techniques.

Brokerage Account Examples

Two real-world examples of brokerage accounts that help individuals understand the benefits and workings of this type of account are TD Ameritrade and Fidelity Investments.

TD Ameritrade offers stock trading, investment opportunities and brokerage accounts. It is a popular online brokerage for trading, long-term goal setting, investing and retirement planning.

TD Ameritrade offers six standard brokerage accounts to suit investors’ individual needs. Fidelity Investments offers a wide range of investment opportunities, research options, zero commission, trading apps, 24/7 customer service, and a weighted credit score.

Fidelity Go will handle your investments and build a strategy to meet your needs.

Types of Brokerage Accounts

There are three types of accounts that individuals can open.

  • Cash account: A cash account lets individuals buy securities with money in their account. A person cannot invest if there is no money in their account.
  • Joint brokerage account: Two or more individuals, typically spouses or family members, who have similar financial goals can share a joint brokerage account.
  • Margin account: A margin account lets individuals take out a loan to invest. They must pay interest on this loan that is funding their investment.

Brokerage Account vs. Retirement Account vs. Bank Account

Brokerage AccountRetirement AccountBank Account
Primary UseInvestingLong-term growthEveryday spending
FeesNo feesNo feesNo fees
TaxesCapital gainsTax-deferred or tax-free growthEarned interest
ContributionsUnlimitedCaps on annual contributionsUnlimited
WithdrawalsNo limits or penaltiesHas limits and penaltiesNo limits or penalties

How to Choose a Brokerage Account

There are a few factors to consider when choosing a brokerage account that is best for your goals and interests.

  • Commissions and fees: You can narrow down the list of brokers by looking at commissions and broker fees. A low-cost investment advisor saves you money. There is also a robo-advisory option that provides automated, low-cost investment advice.
  • Reputation: It is best to choose a financial advisor and brokerage firm that has years of experience and a reputation for being trustworthy in the industry. If you choose a new brokerage, make sure it is a regulated firm with a license to operate.
  • Federal Deposit Insurance Corporation (FDIC): The FDIC is a regulator in the industry. Make sure your personal financial advisor is a member of the FDIC.
  • Customer reviews: Compare reviews of different brokerages. When you base your decision on the experiences of others, you can make the best choice.
  • Investment options: Different brokers offer a selection of options to choose from, such as stocks, mutual funds, ETFs, and bonds. Some brokers offer more unique choices, such as cryptocurrency and foreign currency.
  • Customer service: Find a broker who is available 24/7 to address your questions or concerns. You need a broker who has a solid track record of helping clients understand investments and the associated risks.
  • Security: Find out how your broker is going to keep your investments and money safe while your account is open.
  • Account minimums: The account minimum is the initial investment a client must pay their broker. Many brokers and mutual funds require a start-up fee, which can be as high as $1,000.
  • Tools and educational resources: Find a broker that offers resources, courses, live online sessions and educational guides that facilitate long-term financial growth.

How to Open a Brokerage Account

There are a few key steps to keep in mind when opening a brokerage account to invest your money.

  1. Determine the type of brokerage account you need: Choose between cash, joint or mutual brokerage.
  2. Compare commissions and fees: Some brokers charge you a fee to buy mutual funds, close your account or withdraw your money prematurely.
  3. Consider the investment options offered: Select your choice of primary investment, such as buying stocks, bonds, ETFs, or mutual funds.
  4. Decide on a brokerage firm: Choose the brokerage firm that complies with your long-term goals and monetary constraints.
  5. Create an account: Open your account. (Some brokers offer a no-deposit start-up.) You will need to provide personal information such as your driver’s license, social security number, credit card history, current net worth, etc.
  6. Fund the account: Deposit money into your brokerage account from your checking or savings account.
  7. Start researching investments: Do your own research before investing. Speak with your broker and study the educational resources.

Is it a Good Idea to Have a Brokerage Account?

A brokerage account is a good idea for an investor who wants to maximize their earning potential. It is a way to achieve long-term financial growth, and it has more flexibility and investment possibilities than a typical savings account.

A brokerage account lets you transact in a variety of investment products, such as stocks, bonds, mutual funds, and cryptocurrencies. Always research brokerages thoroughly before you make your choice to invest.

When all your questions have answers that put your mind at ease, you are ready to open your brokerage account.

Brokerage Account FAQs

These are answers to frequently asked questions and about brokerage accounts.

Can I have multiple brokerage accounts?

Yes, you can have more than one brokerage account.

Do I pay taxes on a brokerage account?

A brokerage account is not tax-free. You must pay taxes in the years you receive taxable income from your brokerage account.

How do I take money out of my brokerage account?

You can withdraw money from your brokerage account by accessing the firm’s website and following the step-by-step process.

Can you lose money in a brokerage account?

Yes, you can lose funds in your brokerage account if the value of securities declines over time.

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Robinhood has commission-free investing, and tools to help shape your financial future. Sign up and get your first stock free.

We earn a commission if you sign up, at no additional cost to you.

I'm Donny. I'm a world traveler, investor, entrepreneur, and online marketing aficionado who has a big appetite to compete and disrupt big markets. I thrive on being able to create things that impact change, difficult challenges, and being able to add value in negative situations.

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