What is a brokerage account?

TL;DR

  • A brokerage account is an investment account that is used by a person who wants to trade securities such as stocks, bonds, and mutual funds.
  • There are many different types of brokerage accounts and brokerage firms. It is important to compare different fees and offerings when deciding which type of account to open.
  • Most first time investors set up a cash brokerage account rather than a margin brokerage account because of the interest rates associated with margin accounts.
  • Most brokerage firms are known as broker-dealers because they execute trades on behalf of clients, as well as on behalf of themselves.

What is a brokerage account?

A brokerage account sometimes referred to as a securities account, is a type of investment account that a person can open with a brokerage firm. An investor is expected to deposit money into a brokerage account and use available funds to invest in various securities such as stocks, bonds, and mutual funds. Choosing a brokerage firm and a securities account can be stressful given how many different options exist in the market, so it is important to explore different offers before settling on one.

How to sign up for a brokerage account?

Since many brokerage firms offer brokerage accounts, a future investor needs to investigate which one makes the most sense for her. There are two common types of account providers: online and managed. An online brokerage account allows an investor to manage her investments through a website or app. A managed brokerage account provides an investor with a human or robot investment manager who advises what securities are best for her portfolio. A managed account is ideal for someone who wants to take a more hands-off approach to investing. An investor should also compare commission fees and minimum deposits required by different brokerage firms. Managed accounts often have trading fees, which may not be economical for some investors.

When opening a managed or online brokerage account, an investor will be asked to choose between a cash account or a margin account. A margin account offers a line of credit, which allows investors to purchase securities by using money borrowed from the brokerage firm. On the other hand, a cash account requires an investor to pay for securities with only the cash immediately available in the brokerage account. If an investor chooses to create a margin account, she will be required to pay interest on any money borrowed. Due to this additional cost, and therefore added risk, many new investors choose to set up a cash account instead of a margin account.

After an investor decides what brokerage firm and account best suit her needs, the sign-up process becomes fairly straightforward. Most brokerage firms require an applicant to provide a social security number, a government licensed ID, employment status, financial information, and an overview of investment objectives. Once the application is approved, an initial deposit of funds will be required to start investing.

What is a broker-dealer?

A brokerage firm acts as a broker when it engages in trades on behalf of customers and acts as a dealer when it engages in trades on behalf of itself. Most brokerage firms function as both brokers and dealers and are therefore referred to as broker-dealers. Since broker-dealers facilitate trading, they are an essential part of the securities market. In order to set up a brokerage account, a customer will often engage with a brokerage firm that functions as a broker-dealer.

Bottom line

At the end of the day, a brokerage account is necessary for anyone interested in investing in stocks, bonds, and mutual funds. There are many different brokerage firms and accounts available to investors, so it is important to compare different fees and services offered before signing up for an account. Whether an investor requires a hands-on or hands-off approach to investing, will determine if she wants an online or managed account. Additionally, an investor will have to choose between a cash and margin account depending on whether she wants to use available cash or borrowed funds to pay for trades. Regardless of the type of account an investor chooses, setting up a brokerage account is an important step toward building an investment portfolio.

Courtney is a freelance writer and finance professional based out of New York City. You can connect with her on Twitter at @CourtSaintJames.

The above content is provided is paid for by Public and is for general informational purposes only. It is not intended to constitute investment advice or any other kind of professional advice and should not be relied upon as such. Before taking action based on any such information, we encourage you to consult with the appropriate professionals. We do not endorse any third parties referenced within the article. Market and economic views are subject to change without notice and may be untimely when presented here. Do not infer or assume that any securities, sectors or markets described in this article were or will be profitable. Past performance is no guarantee of future results. There is a possibility of loss. Historical or hypothetical performance results are presented for illustrative purposes only.

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