A brokerage account is what most investors use to buy and sell securities like stocks, bonds, and mutual funds. Unlike banks, brokerage firms allow you to invest in a variety of assets and provide access to the stock market. In this guide, we'll explore what a brokerage account is, how it works, and what you need to know before opening one.
What is a Brokerage Account?
A brokerage account is an investment account held at a licensed brokerage firm. An investor deposits funds into their brokerage account and uses the funds to purchase securities. The brokerage firm acts as an intermediary between the investor and the securities markets, executing trades on the investor's behalf.
Brokerage accounts are not FDIC-insured like bank accounts. However, brokerage firms are regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA), which provide some level of protection to investors.
Types of Brokerage Accounts
There are several types of brokerage accounts, each with its own set of features and benefits. The most common types of brokerage accounts are:
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Individual Brokerage Accounts: These are accounts owned by a single individual and are the most common type of brokerage account.
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Joint Brokerage Accounts: These are accounts owned by two or more individuals, such as spouses, and allow both parties to trade and manage the account.
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Retirement Accounts: These are accounts specifically designed for retirement savings, such as Individual Retirement Accounts (IRAs) and 401(k) rollover accounts.
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Margin Accounts: These are accounts that allow investors to borrow money from the brokerage firm to buy securities.
Opening a Brokerage Account
If you want to invest in the stock market, you need to open a brokerage account first. These accounts are your gateway to the markets, and the process of opening one is relatively simple.
To open a brokerage account, you'll need to provide personal information such as your name, address, and social security number. You'll also need to select the type of account you want to open and provide funding for your account.
Most brokerage firms allow you to fund your account via electronic transfer, wire transfer, or by mailing a check. Once your account is funded, you can begin trading securities.
Fees and Commissions
Brokerage firms make money by charging fees and commissions on trades and other services. These fees can vary widely depending on the brokerage firm and the services you use.
Common fees and commissions include:
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Trading commissions: These are fees charged by the brokerage firm for executing trades on your behalf. They can be a fixed dollar amount or a percentage of the trade's value.
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Account fees: These are fees charged by the brokerage firm for maintaining your account. They can include annual fees, inactivity fees, and other charges.
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Mutual fund fees: These are fees charged by mutual funds for managing your investments. They can include expense ratios, sales charges, and other fees.
It's important to understand the fees and commissions associated with your brokerage account, as they can significantly impact your investment returns.
Brokered CDs
If you want to boost your savings while keeping your financial portfolio safe, a brokered CD might be an option worth considering. Brokered CDs are certificates of deposit that are sold through brokerage firms, rather than banks.
Brokered CDs offer higher interest rates than traditional bank CDs, and they are also FDIC-insured up to $250,000 per depositor. However, they can be more complex than traditional CDs and may have higher fees.
Choosing a Brokerage Firm
Choosing the right brokerage firm is essential to your success as an investor. There are many factors to consider when selecting a brokerage firm, including:
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Fees and commissions: Make sure you understand the fees and commissions charged by the brokerage firm and how they will impact your investment returns.
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Investment selection: Look for a brokerage firm that offers a wide range of investment options, including stocks, bonds, mutual funds, and ETFs.
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Trading tools and platforms: Look for a brokerage firm that offers easy-to-use trading tools and platforms that fit your investing style.
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Customer service: Look for a brokerage firm that offers excellent customer service and support, including access to knowledgeable representatives.
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Security and regulation: Look for a brokerage firm that is regulated by the SEC and FINRA and has robust security measures in place to protect your account.
Bankrate's Picks for Best Online Stock Brokers
If you're looking for an online stock broker, Bankrate has compiled a list of the best online brokers based on investing style and major benefits. Some of the top picks include:
- Best for low costs: Robinhood
- Best for beginners: TD Ameritrade
- Best for active traders: E*TRADE
- Best for ETFs: Charles Schwab
- Best for mobile: Fidelity
Conclusion
A brokerage account is a tool you can use to invest in the stock market. They are also called taxable investment accounts to differentiate them from retirement accounts. Brokerage accounts are offered by licensed brokerage firms and allow you to buy and sell various assets like stocks, bonds, and mutual funds. When choosing a brokerage firm, consider factors like fees and commissions, investment selection, trading tools and platforms, customer service, and security and regulation. With the right brokerage account and investment strategy, you can start building wealth and achieving your financial goals.
