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What Is a Brokerage Account?
A brokerage account is an investment account used for trading securities. The account is held at a licensed brokerage firm.
A brokerage account allows an investor to deposit funds with a licensed brokerage firm and then buy, hold, and sell a wide variety of investment securities. After the investor deposits funds into the account, the broker executes orders for investments such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs) on behalf of the investor.
Different types of brokerage accounts include discount, full-service, online, and robo-advisor. It’s important to choose the right account, and right brokerage, based on your financial needs.
Brokerage accounts come with safety aspects, such as Securities Investor Protection Corp. (SIPC) protection.
Key Takeaways
- A brokerage account lets investors buy, hold, and sell a wide variety of securities like stocks, bonds, and ETFs.
- There are different types of brokerage accounts, such as full-service, discount, and robo-advisor, each catering to different investor needs.
- Full-service brokerages offer personalized advice but come with higher fees, while discount brokerages are more cost-effective for self-directed investors.
- Robo-advisors provide low-cost investment management using algorithms, making them suitable for hands-off investors.
- SIPC insurance protects brokerage accounts against brokerage firm failures, but not against market losses.
Michela Buttignol / Investopedia
Brokerage Accounts: An In-Depth Overview
Many types of brokerage accounts and firms exist, letting investors choose what fits their financial needs best.
Some full-service brokers provide extensive investment advice and other wealth management services, but charge high fees and come with large account minimums. On the other end of the spectrum, most online brokers provide a simple and secure interface for investors to place trades for no commission. Robo-advisors are another category of financial services provider. These digital platforms offer financial planning and investment services driven by algorithms, not people. Typically, they are low-cost and have low account minimums.
Brokerage accounts may differ in order execution speed, scope of tradable assets, depth of analytical tools, and the extent to which investors can trade on margin.
For any type of brokerage, the most basic account is a cash account. This allows you to buy investments using the money deposited in the account. However, you can’t sell short, buy on margin, trade options, or take advantage of other more sophisticated products, as those require a margin account.
A margin account allows you to borrow additional funds from your broker. The securities in your account serve as collateral. Brokerages charge maintenance interest on these loans, and you may be required to immediately deposit additional funds if the securities in the account lose too much value—this is what is known as a margin call. If you can’t meet a margin call, your broker may close some or all of your positions to meet the margin requirement.
Fast Fact
The assets in investment accounts belong to investors, who usually must report income or loss on their taxes.
Exploring Different Types of Brokerage Accounts
Full-Service Brokerages: Features and Benefits
Investors seeking the expertise of a financial advisor can consider full-service brokerage firms such as Merrill, Morgan Stanley, UBS, and Wells Fargo Advisors, among others. Financial advisors are paid to help their clients develop investment plans, execute trades, monitor investments and market trends, and more. Financial advisors may work on a nondiscretionary basis, where clients must approve transactions, or on a discretionary basis, where transactions don’t require prior client approval.
Full-service brokerage accounts charge either commissions on trades or advisor fees. A commission account charges a flat fee anytime an investment is bought or sold, whether the recommendation came from the client or the advisor, and whether the trade is profitable.
By contrast, an advisor fee account involves flat annual fees ranging from 0.5% to 2% of the total account balance. In exchange for this fee, no commissions are charged when investments are bought or sold. Such accounts generally come with higher account minimums. Investors should discuss compensation models with financial advisors at the onset of relationships.
Discount Brokerages: Cost-Effective Trading Options
Investors who favor a do-it-yourself investment approach might consider a discount brokerage firm. These firms charge significantly lower fees than their full-service counterparts but also offer fewer services. Discount brokerage firms, such as Schwab (SCHW) and Fidelity (FIS), are best suited for cost-conscious investors who prefer to make their own trading and investing decisions.
For example, an investor who decides on a typical discount broker can open a regular taxable brokerage account (or a retirement account) with a minimum deposit as low as $0. Nowadays, most brokers charge no commission to buy or sell most stocks, options, or ETFs. Some discount brokers may charge fees for non-U.S. or thinly traded stocks, but this varies from broker to broker. Generally, they also charge for trading more complex instruments, such as futures, or more exotic assets, such as cryptocurrencies.
Buying Treasury bonds is often commission free, but charges might apply for secondary market trades. Many brokers, including Schwab, Fidelity, and E*Trade, also offer a wide variety of no-fee mutual funds.
Important
Do-it-yourself traders should be careful when trading low-volume stocks, which may not have enough liquidity to easily enter or exit positions.
Robo-Advisors: An Automated Investment Approach
Robo-advisors are platforms where automated algorithms make investment decisions on behalf of clients without human participation. Those investments are usually restricted to pre-defined strategies and limited to specific instruments, such as mutual funds or ETFs. Robo-advisors generally charge a flat monthly or annual fee or an annual commission of around 0.25% to 0.50% of assets under management.
The minimum required to open an account can range from $0 to $500 to over $5,000. Robo-advisors offer a viable alternative for people new to investing and experienced investors who prefer a hands-off approach to portfolio management.
Regional Financial Advisors: Personalized Brokerage Services
Those investors who prefer a personal relationship and a choice of services may also want to work with a brokerage firm that’s part of their community. They could consider a regional firm that falls between full-service and discount brokerage firms on the cost scale. Such companies include Raymond James Financial Inc. (RJF), Janney Montgomery Scott, and Edward Jones.
These brokerages act as both broker-dealers and financial advisors. They can require a sizable minimum deposit and cater to individuals with slightly higher net worth. Over time, though, their services tend to be less expensive than those of larger brokerages.
Online Brokerages: The Digital Trading Experience
Online brokerages are a good choice for investors who prefer to select their own investments and execute their own trades via a website or mobile app. Many also offer more in-depth research and analysis tools to help clients make informed decisions.
Robinhood Markets Inc. (HOOD) pioneered no-fee stock, ETF, and options trading back in 2013, and most online brokers have since followed suit. Robinhood generates revenues from payment for order flow (PFOF), margin interest, income from cash holdings, and more. PFOF is the compensation a brokerage receives for directing trades to a specific market maker. The amount paid is usually a fraction of a penny per share.
As of 2025, both well-established and new brokers offer zero-commission stock, ETFs, and options trading, including Charles Schwab, Fidelity, E*Trade, Vanguard, and Interactive Brokers (IBKR).
Understanding Cash Brokerage Accounts
A cash brokerage account requires you to deposit cash to start trading. This account limits your options to the basics, such as buying or selling stock. For example, short-selling a stock is not possible within cash accounts. Cash accounts can be either discount or full-service accounts.
Margin Accounts: Risks and Opportunities
A margin account allows you to borrow additional funds from your broker. The broker acts as a lender, and the borrowed funds allow for larger and more advanced trades, such as short selling. The investor pays interest on the money they borrow. The brokerage may demand an immediate deposit of additional funds from an investor to avoid a margin call, a situation where the value of an account drops below a specific margin requirement level.
Margin accounts are also offered by discount and full-service brokers. While a margin account offers you more flexibility, it also brings additional risks. If you are new to investing, it’s advisable to be extra careful when using leverage.
Fast Fact
To choose the best brokerage for your needs, consider your investing style, your short- and long-term goals, your preferred types of investments, and the level of service and support you want. Costs can also be a major factor for both newer and experienced investors.
Ensuring the Safety of Your Brokerage Account
Yes, brokerage accounts are generally a safe place to keep your money. However, that doesn’t mean that they’re without risk.
The Securities Investor Protection Corp. (SIPC) is a nonprofit organization that provides coverage to investors in case their brokerage firm faces financial difficulties or goes bankrupt. The SIPC safeguards customers’ assets, including cash and securities like stocks and bonds, held within a brokerage account at an SIPC-member firm.
SIPC protection is capped at $500,000 per customer per firm, with $250,000 for cash. It’s important to note that SIPC protection does not cover investment losses because of market fluctuations or poor investment decisions. Instead, it focuses on protecting customers’ assets in the event of a brokerage firm failure or misconduct. Most brokerage firms in the United States are members of the SIPC, providing their customers with this added layer of protection.
Even with SIPC protection, beware of the risks and only invest money you can afford to lose.
Choosing the Right Brokerage Account for Your Needs
When opening a brokerage account, don’t settle for the first option; ensure you pick the right one. The first step to choosing the right brokerage account is to consider your needs.
Are you an active or passive investor? Are you looking to focus exclusively on mutual funds, ETFs, stocks, bonds, other securities, or a combination of all of them? Do you plan on making mostly basic market orders, or do you want more advanced order types?
Brokers cater to different investors; some feature options for buy-and-hold investors who prefer mutual funds and ETFs. Others will have advanced tools that are valuable to frequent traders and people who are interested in more complex instruments like options and futures.
Once you understand your needs, compare brokers to see which services match your goals.
Steps to Opening a Brokerage Account
- Identify your investment needs and preferences.
- Research suitable brokerage firms that align with your goals.
- Prepare personal information, such as your Social Security number and employment details.
- Navigate the brokerage’s website to initiate the account-opening process.
- Answer questions about your financial goals, risk tolerance, and trading preferences.
- Fund your account via Automated Clearing House (ACH) transfer, wire, or other accepted methods.
- Begin investing once your account is funded and active.
Comparing Standard and IRA Brokerage Accounts
Investors can open a standard brokerage account and an individual retirement account (IRA). In fact, you can open an IRA even if you already have a workplace retirement plan, such as a 401(k). It’s a good idea because it gives you an additional tax-advantaged opportunity to save for retirement.
Knowing the difference between a standard brokerage account and an IRA can help you decide whether you should open one or the other—or both.
Standard Brokerage Account vs. IRA Brokerage Account
Standard Brokerage Account
- Investments are taxed
- You can deposit and withdraw funds as often as you like; there is no limit on deposits or withdrawals
- Deposits are not tax deductible
- You can invest in any securities offered by your brokerage
- Used for all kinds of purposes; e.g., to build wealth over the long term and reach short-term financial goals, such as buying a home
IRA Brokerage Account
- Investments are tax-advantaged
- Annual contribution limit on deposits; withdrawals incur tax penalties until you reach the age of 59½
- Traditional IRA: Contributions are tax deductible but withdrawals are taxed as income; Roth IRA: Contributions aren’t deductible, but withdrawals are not taxed
- Earnings grow undiminished by taxes
- You can invest in a wide range of securities offered by your brokerage
- Used to invest for long-term retirement savings goals
How Do I Open a Brokerage Account?
Opening a brokerage account online is a relatively quick and easy process. You register on the brokerage site and provide some required personal information such as your address, date of birth, and Social Security number. Account approvals are fast, and the next step is to fund your new account, which can also be done online via ACH or wire transfer.
Is It Dangerous to Have a Margin Account?
A margin account involves greater risks compared to a cash account, where you buy shares of stock with your own money. Careless margin trading can have devastating effects if you overleverage and the market turns sharply against you, resulting in losses. If you are unable to meet a margin call requiring to add additional money to the account, your broker may sell any securities in your account to meet the call.
Can I Have Multiple Brokerage Accounts?
Yes. Although there are pros and cons to having your assets invested in several places, there’s nothing preventing you from having multiple accounts with one or several brokers. You may, for example, use one broker for long-term investing and another for trading or short-term plays.
Which Brokerage Accounts Let Me Trade for Free?
Since Robinhood opened the doors to commission-free trading, dozens of online brokerage platforms have followed suit. These include major names such as Schwab, E*Trade, Interactive Brokers, and Fidelity. Some fees other than trading commissions may apply.
How Does a Brokerage Account Differ from a Bank Account?
Brokerage accounts hold securities such as stocks, bonds, and mutual funds, as well as any unused cash, and are used for investment purposes. A bank account only holds cash deposits and provides money-managing tools such as debit cards and checks. Some brokerage accounts also provide a debit card and allow you to write checks. Many bank accounts are Federal Deposit Insurance Corp. (FDIC)-insured for up to $250,000. Brokerage accounts usually have SIPC protection, which can help recover some value of such accounts if a brokerage goes bankrupt.
The Bottom Line
The benefits of a brokerage account are allowing an investor to buy, hold, and sell a wide variety of investment securities. The range of options includes stocks, bonds, mutual funds, and ETFs.
Brokerage account types vary to cater to different investor needs and preferences. Those types include full-service brokerages, which offer personalized advice but with higher fees; discount brokerages, which are more cost-effective for the self-directed investor; online brokerages, which let investors make their own investments and trades via a website or app; and robo-advisors, which are preferable for hands-off investors by providing low-cost investment management using algorithms.
Investors should consider their needs, investment goals, and risk tolerance when choosing their brokerage account type.
Exercise caution with trading on margin in a brokerage account, as a margin account allows you to borrow from your broker and put up collateral from your account. You must deposit more funds if the account’s securities lose too much value, and if you can’t, your broker may close some or all of your positions.
Safety measures such as SIPC protection ensure the security of funds in brokerage accounts against broker defaults, but they don’t protect against market losses.
You can utilize brokerage accounts as a tool for long-term wealth building and financial planning, including retirement savings through options like IRAs.
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