What is a Brokerage Account

What is a brokerage account?

Brokerage account is synonymous with investment account. Once money has been deposited into a brokerage account, it can be used to purchase stocks, bonds, and mutual funds, among other investments. An online broker may be used to open a brokerage account.

Is a brokerage account right for you?

YES, A BROKERAGE ACCOUNT IS A GOOD CHOICE IF …

• You want to purchase and manage your own investments. To do so, you need a brokerage account.
• You want to invest money for retirement _(_and you’re already contributing enough to earn a 401(k) match, if your employer offers one). In this case, you want a specific type of brokerage account called a Roth or traditional IRA. These have important tax benefits.

OTHER ACCOUNTS MIGHT BE A BETTER FIT IF …

• You’d rather have someone else do the day-to-day work of managing your retirement account or other investments. If this sounds appealing, consider opening your brokerage account at a robo-advisor, which is a low-cost alternative to a human investment manager. A robo-advisor will choose and manage your investments for you, based on your goals.
• You are saving for a goal you want to accomplish in the next five years. With that short time horizon, steer clear of the stock market and consider an online savings account or other short-term investments.

Nervous about investing?

Given a long time horizon, money invested in the stock market can rise by a factor of ten, as opposed to sitting in cash or a low-interest savings account, where you risk losing purchasing power due to inflation.

In spite of this, 39% of Americans say they are not investing, according to a 2018 Harris Poll online study. 32% of them prefer cash over investment because it’s easier to access, while 28% prefer cash because they don’t know how to invest (here is where robo-advisors might be useful). Moreover, 28% believe that investing is too dangerous. Also included in the survey’s definition of cash are the balances in checking and savings accounts.

In truth, when investing for a long-term goal like retirement, not investing is risky; most people cannot save enough to meet their retirement demands. Stock market returns make up for the shortfall.

The typical American holds $32,286 in cash, according to a poll by NerdWallet. (It is important to note that the median amount of cash held by Americans is only $2,000, showing that rich savers are distorting the average figure.)

While everyone should have some cash on hand for emergencies, those who save more than they need incur a cost. Over a thirty-year period, our calculations indicate that every $10,000 retained in cash rather being invested results in a loss of returns of almost $44,000.

Curious about the value of your surplus cash? Use the calculator to compute your own numbers.

How to choose a brokerage account

You will likely want to register an account with an online broker that allows you to effortlessly purchase and sell investments through its website or trading platform. Determine the best online broker for you based on the following variables before opening an account.

• Investment selection: You’ll want to pick a broker that offers a wide range of investments. Brokerage accounts allow you to buy and sell everything from individual stocks to complex investments like currency, futures and options contracts. You can build a diversified portfolio with just a few mutual funds.
• Commissions: Nearly all online brokers will charge a trade commission, typically $5 to $10 per trade. (One notable exception: Robinhood, an investing app, offers commission-free trades.) A broker’s commission will apply to trades of stocks, options and exchange-traded funds. You may also be charged a transaction fee for buying mutual funds; however, many brokers offer commission-free ETFs and no-transaction-fee mutual funds.
• Account fees: These include annual fees, inactivity fees, and extra charges for trading platforms, research and data. These charges can be avoided completely in many cases by choosing the right broker.
• How often you plan to trade: If you plan to trade frequently, you’ll want to find a broker with low commissions. If you don’t anticipate trading often, be sure the broker doesn’t charge inactivity fees.
• Support: Brokers offer varying levels of educational and customer support. Make sure the one you choose has resources available to answer your questions.
• Minimums: A broker’s minimum deposit requirement can range from $0 to $2,500 or more.

How to open a brokerage account

Creating a brokerage account is normally a straightforward process that may be completed online. In most states, the minimum age to open a brokerage account is 18, but parents can open accounts for their minor children.

Once the account has been created, you must initiate a deposit or money transfer (often of a minimum amount, as noted above). The procedure of transferring funds can take between a few days and a week. After this is accomplished, you can start investing.

You may be asked whether you prefer a cash or margin account. A margin account allows you to borrow money from your broker in order to trade, but it is hazardous and you will be charged interest. Generally speaking, it is advisable to begin with a cash account.