What is a brokerage account, and how is it used?

A brokerage account is a type of financial account that lets you buy and sell investments like stocks, bonds, exchange-traded funds (ETFs), and mutual funds. It’s quick and simple to set up your own brokerage account online through a brokerage firm and pay money into it to invest in stocks and shares.

Brokerage accounts are often used to build savings over the long term, and many people use them to set aside a nest egg for retirement.  

They have certain advantages over retirement accounts, however. There’s no limit on the amount you can pay and no penalty for accessing your funds before retirement age.  

If you’re saving to pay for your kids to go to college or planning a big home renovation project in the near future, a brokerage account gives you the flexibility to withdraw money whenever you need. 

On the flip side, brokerage accounts don’t have any tax advantages, unlike retirement accounts. That means you’ll pay tax on investment gains through a brokerage account. 

How does a brokerage account work? 

You can open a brokerage account online, and there’s usually no minimum deposit needed or fee to pay.  

You’ll need to pay money into your account before you buy any investments; however — you can do this by transferring funds from another account.  

Alternatively, you could opt for a margin account to borrow money from the brokerage firm to make trades. This is a higher-risk option, and you’ll pay interest on the amount you borrow. 

Once set up, you own the money and investments in your account, and a broker acts as an intermediary, facilitating the investments you buy. Depending on the type of brokerage account you choose, this middleman might be a trained professional with a team of analysts behind them who also offers advice on market conditions and your financial strategy. 

More commonly, the broker is an automated network that lets you buy and sell investments yourself. Sitting somewhere between these two options, so-called robo-advisors use algorithms to implement investment strategies on behalf of brokerage clients. 

What is a brokerage firm?

A brokerage firm connects buyers and sellers to facilitate purchasing or selling stocks, shares, bonds, and other securities. 

Full-service brokerage firms receive either an annual fee or a commission from each transaction. Most discount or online brokerages offer zero-commission trading. They make money through payments from exchanges or trading fees for other products. 

What types of brokerages are there? 

There are several different types of brokers and brokerage firms. A financial advisor can give you more information on the key differences between them and the one that’s right for you. 

Here are the main types of brokerage firms to choose from: 

Full-service brokerages 

Staff at full-service firms are experienced, professional brokers and financial advisors who analyze market conditions and advise their clients accordingly. They typically have large research departments and can provide reports and recommendations to clients. Well-known examples include Merrill Lynch and Morgan Stanley. 

Full-service firms often target high-net-worth (HNW) clients and stipulate a minimum account balance – typically six figures or more. Certain accredited clients can access special financial products, such as IPOs, limited partnerships, and alternative investments. If you’re an accredited investor or HNW individual, a full-service brokerage will likely be a good option. 

Full-service brokerages charge clients a fee. This may amount to $10 or $20 per trade or an annual fee of between one and three percent.  

Self-directed online brokerages 

Also known as discount brokerages, self-directed online brokerages allow investors to input orders directly online. They offer a range of investments, including stocks, bonds, and funds. 

Some well-known examples of discount brokerages include Charles Schwab and Ameritrade. Most online brokerages have no minimum account balance and zero fees for basic trading services. 

Robo-advisors 

It might sound implausibly futuristic, but a robo-advisor is a platform that uses algorithms to identify and implement trading strategies for its clients. 

Robo-advisors typically stipulate only low entry fees and work on a zero-commission basis. You can expect to pay between 0.25 and 0.5 percent per year – much less than a full-service brokerage. 

The algorithms used by robo-advisors typically follow long-term, passive investment strategies, but some allow clients to take a more active role in investment management. Others may have human advisors on hand if you want personal guidance. 

How to open a brokerage account 

You can usually set up a brokerage account online in around 15 minutes. You might be given the option of setting up a cash or margin account. A margin account lets you borrow money from your broker to make trades. With a cash account, you’ll only use your own money to make trades.  

Be aware that if you opt for a margin account, you’ll pay interest on the amount you borrow. That makes this an expensive and high-risk option if your investments decline in value. 

Before your account is activated, you may have to verify a transaction. This is when a broker places a small sum of money (a few cents) into your account. You’ll then have to confirm the amount that was deposited. 

Once your brokerage account is set up, you only need to transfer funds from another account – again, you can do this online. Then you can start buying investments straight away. 

Be aware that while many brokerage accounts don’t need a minimum balance, certain funds and indexes might. A financial advisor can advise you on the money you’ll need before investing in particular stocks or shares. 

Is a brokerage account right for you? 

Whether you’re looking to build a savings pot for retirement or taking your first steps in investing, setting up a brokerage account is a great place to start. There’s no minimum or maximum contribution; you can withdraw money anytime. 

But what’s the right kind of brokerage account for you, and how can you get one?  

An independent financial advisor can advise you on the best brokerage account for your financial situation and goals. They can walk you through the process of setting up an account and advise you on an investment strategy once you’re up and running. 

Here at Unbiased, we match professionals with regulated, independent financial advisors. Just fill out our simple form, letting us know more about your financial situation and needs, and we’ll send you an email that matches you with a financial advisor operating in your area. You can make an appointment to speak with your advisor at a convenient time – and the first consultation is completely free.