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What is a brokerage account and how does it work?
If you want to invest in any stocks or funds, you need to open an account with a brokerage company. The most convenient way is to open an account with an online broker.
A brokerage account is an investment account opened with a brokerage company. You deposit money into the account, and use this money to buy and sell stocks, funds, and other securities.
There are several different types of brokerage firms, with different levels of service offered.
How is a brokerage account different from a bank account?
Unlike a bank account, a brokerage account can be used to buy and sell sells, funds, and other investments. You can fund your brokerage account with cash and then use this cash to purchase investments.
Bank accounts, which include checking accounts, savings accounts, and money market accounts, also allow you to deposit cash, but you cannot purchase investments through them.
|Brokerage account||Savings account||Savings account|
|Saving||Easy access to cash|
|What is it good for?||Long term savings |
Exposure to the stock market
|Emergency funds |
Medium term saving
|Daily purchases |
|Do I earn interest?||No, but your money can grow (or decline) through investments you choose to hold||Low but more than a checking account||Minimal or 0%|
Should I open a brokerage account?
A brokerage account is great if you want to save money for the long term and want exposure to the stock money.
Brokerage accounts are good for saving for college tuition, down payment for a house, a car, and other big purchases. Or perhaps you simply want to fund a nest egg.
The biggest benefit of a brokerage account is that you can take advantage of potential long-term growth in the public markets.
Historically, the S&P 500, a commonly used public market index, has had average annual returns of 8% since 1957. Most savings accounts have interest rates that are closer to inflation, which historically has been 3.1%.
Use our investment calculator to see how much money could you save if you invested your money in the market.
Types of brokerage accounts
There are two primary types of brokerage accounts that meet the needs of most people.
- Online brokerage firms, and
- Managed brokerage firms
Online brokerage accounts
Online brokerage firms are a great choice if you want to choose which stocks, bonds, mutual funds, ETFs, and other securities to buy and sell. You are your own manager. Online accounts can generally be funded with $500-$2,500, and varies by brokerage.
These tend to have:
- Lower fees
- Don’t offer investment advice: You research and decide what to invest in.
Some also offer educational resources such as articles, webinars, sophisticated trades, and trading screens.
Managed brokerage accounts
Managed brokerage firms provide investment advice and a variety of products to those who do not want to manage their own investments. You prefer to have other pick and choose which investments to buy and sell.
Managed brokerage accounts can be further broken down into:
- Human managed / Financial advisor
Robo-advisors are investment accounts managed primarily by artificial intelligence with little human supervision. Robo-advisors generally ask you questions about your financial situation and financial goals, and then use these answers to create an investment plan.
Robo-advisors generally have lower fees and smaller minimum balances than human managed brokerage accounts.
Human managed / Financial advisor
Managed brokerage accounts that have a financial advisor will generally go over your financial situation with you, such as any debts, retirement plans, insurance, home ownership, income, and more, in order to put together investment recommendations.
How to open a brokerage account?
Opening a brokerage account is simple and can take as little as 15-20 minutes. After you choose an online brokerage firm, you will fill out an online application.
You will generally be asked for identifying information (Social Security number, date of birth), contact information, and employment information.
Once the account is open, you will need to fund the account with cash. This can be wired, direct deposited, or sent via check. Most online brokerages can be funded with $500-$2,500, but this varies with the brokerage.
Once the cash transfer is complete, which may take up to a few days, you can start investing.
When you open up an account, you may be asked if you want a cash account or a margin account. We recommend starting out with a cash account for beginners as margin accounts can be risky.
A cash account is an account funded with cash. The cash that you fund it with can be used to purchase securities.
A margin account allows you to borrow money from your brokerage firm and invest it. While it can magnify your returns if your investments increase in value, it can also magnify your losses if your investments decrease in value.
Moreover, if the price of the stocks you are holding go down a lot, you might get a margin call. This is when your broker requires you to provide more cash or equities. If you cannot, your broker can sell some of your positions.
What’s the difference between a brokerage account and a retirement account?
A brokerage firm generally offers both a standard brokerage account as well as retirement accounts. What’s the difference?
The main difference is taxes. Both accounts allow you to invest in stocks, mutual funds, ETFs, and other investments.
A retirement account, such as an IRA or a Roth IRA, is tax-advantaged, which means that there some tax benefits when you invest through them.
A standard brokerage account does not have any tax benefits. You will need to pay taxes on your investment earnings.
If you are investing for retirement, we recommend that you open a retirement account and take advantage of the tax benefits. If you are not investing for retirement or have maxed our your IRA contributions, then you might want to open a standard brokerage account.
Here is a summary of the advantages and drawbacks of each.
|Standard brokerage account||Retirement account|
|Purpose||Long-term savings |
Exposure to the public stock market
|What is it good for?||Future savings |
Big purchase savings
Potentially earning higher returns than traditional savings accounts, depending on your investment choices
|Saving for retirement |
Money that you do not plan to withdrawal until retirement age
|Benefits||Unlimited contributions |
|Downside||Not tax advantaged||Early withdrawal penalties |
|Is there a tax benefit?||No |
Investment earnings are taxed
However, can earn a tax benefit from money lost on stocks that have gone down
|Can I take my money out?||Yes||Limited |
Fees and taxes if withdrawn before retirement
|Is there a limit to how much money I can put in the account?||No||Yes |
Annual contribution limits
Brokerage account FAQs
What is the best brokerage account for beginners?
The best brokerage accounts for beginners have no minimum balance to open an account. This way you can become familiar with investing without risking a lot of money.
They should be easy to use and provide some educational content and research tools.
How much money do you need to open a brokerage account?
Some brokerage accounts can be opened with no minimum balance. Others might have a minimum balance of $500-$2,500.
What can you do with a brokerage account?
You can buy and sell stocks, mutual funds, ETFs, and other securities.