Brokerage Accounts: What They Are and How to Open One

Brokerage Accounts: What They Are and How to Open One
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Point Editorial

The term may sound complex, but a brokerage account is simply a specific type of investment account. With it, you can buy, sell, and trade an assortment of investments such as bonds, stocks, and mutual funds. What you choose to do with your funds is ultimately up to you. 

Read on to learn more about the different types of brokerage accounts, how they work, and how to open your own brokerage account. 

What is a brokerage account? 

Brokerage accounts allow account holders to access stocks, bonds, and securities that they can trade and sell. They also allow you to set money aside for future endeavors like retirement or post-secondary education. 

Any investments you earn through your account may be considered a capital gain depending on how long you hold onto those assets, and you will be taxed accordingly. 

Types of brokerage accounts 

“Brokerage account” is an umbrella term that encompasses several different account types, allowing investors to choose which is best suited to their financial wants and needs.  

Full-service brokerage accounts

Also called managed brokerage accounts, full-service brokerage accounts involve brokerage firms that offer guidance to account holders by developing an investment plan, assisting with transactions and trading assets, and contacting external third parties. 

Clients have the option of discretionary or non-discretionary services, meaning that the broker may or may not need to obtain the investor's approval before making any decisions.  

Typically, full-service firms charge advisory fees or commissions. The latter refers to the price paid to the broker each time an investment is purchased, sold, or traded. Advisory fees can range from .5 percent to 1.5 percent. Firms will usually charge one or the other, but not both. 

Morgan Stanley, Wells Fargo Advisors, and Merrill are three of the most famous brokerage firms. 

Discount brokerage accounts

Discount brokerage accounts — or online brokerage accounts — cater to those who want more control over their investments. Essentially, they follow a do-it-yourself approach. Individuals can participate in market activities using virtual trading software. 

They also come with lower fees since there are no intermediary figures and no-full services. 

Fidelity, TD Ameritrade, and E*TRADE are a few examples of organizations that offer discount brokerage accounts. 

How do brokerage accounts work?

Essentially, brokerage accounts are like traditional bank accounts, meaning you can freely transfer money in and out of them. But, unlike bank accounts, they also allow you to access the stock market. 

You can set up an account either through a licensed brokerage firm or online. 

Most investors open a brokerage account as a supplemental means of saving for retirement. But remember, they are not the same as a retirement account. Although they may appear similar and are free to open, they are not interchangeable. Each provides users with specific benefits. Read on to learn more about the main differences between brokerage and retirement accounts.

Taxes 

Both retirement and brokerage accounts are taxable. 

The specific fees that apply to a retirement account depend on the type of account and your age when you withdraw your funds. Traditional IRAs, 401(k) plans, and Roth 401(k) plans are all governed by slightly different regulations.

There are no tax advantages with a brokerage account, but there are advantages depending on your retirement plan. 

Additionally, brokerage funds are susceptible to capital gains taxes, whereas retirement funds are not. The money allocated to the latter grows tax-free until withdrawal. 

Contributions

To set up an account, you will need funds to contribute to it. You can transfer money from a checking, savings, or another brokerage account. However, some firms do not require a deposit. 

Unlike with a retirement account, there is no minimum or maximum contribution threshold you have to meet. Retirement accounts, however, typically cap contributions at $6,000 or $7,000 per year.  

Withdrawals

Brokerage accounts are incredibly flexible. You can withdraw your money from the fund whenever you want without worrying about penalties. 

In comparison, retirement accounts require you to be a certain age to withdraw maximum payments. Age 59 1/2 or older is the threshold. You can take out your money earlier, but this will result in multiple penalties, not to mention that this money will be subtracted from your savings, resulting in less for you to live on once you've left the workforce.  

Primary use 

To reiterate, the primary purpose of a brokerage account is market trading. Resulting returns are often put toward retirement and other personal goals. 

The purpose of a retirement account is literally in the name: to save for your retirement over the long term. 

Unlike retirement accounts, there are no limits on the number of brokerage accounts you can open.

How to open a brokerage account 

Opening a brokerage account is a step toward expanding your financial portfolio. Setting up a fund is a straightforward process. 

Step 1: Choose the type of account. It all begins with your investment objectives. Why are you opening this account? What do you wish to accomplish? Would you prefer a more hands-on approach or a more indirect one?

Step 2: Be aware of costs, incentives, and services offered. You don’t need to be a millionaire to open a brokerage account, but there may be additional fees depending on your selected plan. It's wise to do your research and familiarize yourself before settling on a particular firm. What advantages do they offer? Do they offer access to foreign markets and currency, as well as insight into the best stocks or software? How accessible are they if you need additional guidance over the phone or in a face-to-face meeting? The more information you can gather, the better you will feel about moving forward with this process. 

Step 3: Complete an application. You can do this online or through a visit to a brokerage firm. You will be required to provide your personal information, including your Social Security number, employment status, yearly income, and a government-issued ID. 

Step 4: Make an initial deposit. Once you have an account, you'll want to transfer funds so that it's not just sitting there empty and unused. You can do this both online and at your local bank.

Step 5: Start investing.  

FAQs

Is there a minimum payment to open a brokerage account?

Minimum opening payments vary between accounts. Some firms require at least $1,000 or $2,000, while others will allow you to open a fund for significantly less.

Do I pay taxes on a brokerage account? 

You are required to pay taxes on your brokerage account. Though there are no tax benefits, the amount you must pay varies according to the specific type of account you own. 

Brokerage accounts fall under the capital gains classification, meaning that tax applies when you sell your investments. If you hold onto your assets for an extended period, you will pay fewer taxes. 

Can I take money out of my brokerage account?

Yes. Remember, you can move money in and out of your brokerage account at your discretion.

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