Are you ready to buy stocks, bonds, mutual funds and other investments? The first step is opening a brokerage account.
What is a brokerage account?
A brokerage account allows you to purchase and sell securities such as stocks, bonds, and mutual funds. A brokerage account allows you to transfer money in and out much the same way as a bank account. However, brokerage accounts allow you access to the stock exchange and other investments, unlike banks.
Because investment income in brokerage accounts is treated as capital gain, you’ll see them called taxable accounts. This is in contrast to retirement accounts like IRAs, which have different tax and withdrawal rules and may be more suitable for investing and retirement savings.
What is the working of brokerage accounts?
You can open a brokerage account with various licensed brokerage firms, from full-service stockbrokers to low-cost online discount brokers.
You can open a brokerage account online quickly with many brokers. Most brokerage firms will allow you to open an account without a deposit. You will need to fund your account before you can purchase investments. Transfer money from your checking, savings or brokerage account to fund the account. You might also be allowed to mail a check.
Your brokerage account holds the money and investments. You can also sell investments at any moment. The broker acts as an intermediary between your account and the investments you wish to purchase.
There are no restrictions on how many brokerage accounts you can open or how much money you can put into taxable brokerage accounts each year. A brokerage account should not cost any fees.
Retirement accounts vs. brokerage accounts
Standard brokerage accounts, also known as taxable accounts, do not offer tax benefits for investing through them. In most cases, however, investment income will be subject to tax. These accounts have very few rules. You can withdraw your money at any time and for whatever reason. Here are our top picks for the best brokerage account.
If you invest in retirement, you will want to open a retirement or taxable brokerage account. A retirement account (such as a Roth or traditional IRA) is a tax-advantaged account that you can use to save for retirement. Retirement accounts are not like taxable brokerage accounts. They have restrictions on how and when you can withdraw money, as well as limits on how much you can contribute each fiscal year. Here are our top IRA accounts.
Below is a table that provides an overview of how brokerage accounts compare to retirement accounts.
Nerd tip: You might already be saving for retirement through your employer. Many companies offer a 401(k), an employer-sponsored plan that will match your contributions. While you can still open an IRA, we recommend that you contribute at least enough to your 401k to be eligible for the match.
How to choose a broker account provider
After you have decided whether you want a retirement or taxable brokerage account, you will need to select an account provider. Two main options will meet most investors’ needs: online brokerage and robot advisors. Both offer retirement accounts as well as taxable brokerage accounts.
Online brokerage account
A brokerage account with an online broker can be a great option if you want to manage and purchase your investments.
A brokerage website can help you sell and buy investments. An investment account allows you to purchase and trade securities online. A variety of investments are offered by discount brokers, such as stocks and mutual funds and bonds.
Managed brokerage account
A managed brokerage account includes investment management from either a human advisor or a robot advisor. Robot advisors are a cost-effective alternative to hiring an investment manager. These companies use advanced computer algorithms to select and manage your investments based on your goals.
If you prefer to be hands-off with your investments, Robo-advisors may be the right fit. The top Robo-advisors is available in our complete list.
Notify us that we don’t recommend you invest money in the next five years. You can save money for a short-term goal by skipping the brokerage or investment account.
How to open a brokerage bank account
It is easy to set up a brokerage account. Most applications can be completed online in less than 15 minutes. You must be at least 18 to open a brokerage account in most states. However, here are instructions for parents to set up a brokerage account.
After opening the investment account, you will need to initiate a transfer or deposit. Although it sounds complex, you can link your bank account and brokerage account online.
You may be required to verify transactions by some brokers. If this is the case, the broker will need to deposit a small amount in your account. Usually, it’s a few cents. Then you’ll verify the transaction by notifying the brokerage of the exact amount. The broker will be happy to answer any questions. Once the transfer is completed, and your brokerage account has been funded, you are ready to start investing.
A question might arise about whether you would like a margin or cash account. Margin accounts allow you to borrow money from a broker to trade, but it comes with high-interest rates and is risky. It’s better to start with a cash account.