Wondering how to invest money? Well, if you want to create a stock portfolio and invest in exchange-traded funds or some other investments with the expectation to potentially make a better return than the interest on your savings account, the first step is to open a brokerage account.
Table of Contents:
- What is a brokerage account?
- What are the types of brokerage accounts and which is right for me?
- How to choose a broker?
- How to sign up for a brokerage account?
- What do you need to open a brokerage account?
- What is a broker-dealer?
- Opening a brokerage account with Public.com
- Bottom line
- Frequently asked questions
TL;DR
- A brokerage account is an investment account that is used by a person who wants to trade securities such as stocks, bonds, and mutual funds.
- There are many different types of brokerage accounts and brokerage firms. It is important to compare different fees and offerings when deciding which type of account to open.
- Most first time investors set up a cash brokerage account rather than a margin brokerage account because of the margin rates associated with margin accounts.
- Most brokerage firms are known as broker-dealers because they execute trades on behalf of clients, as well as on behalf of themselves.
What is a brokerage account?
A brokerage account, sometimes referred to as a securities account, is a type of investment account that a person can open with a brokerage firm. An investor is expected to deposit money into a brokerage account and use available funds to invest in various securities such as stocks, bonds, and mutual funds.
Choosing a brokerage firm and a securities account can be stressful given how many different options exist in the market, so it is important to explore different offers before settling on one.
What are the types of brokerage accounts and which is right for me?
There are several different types of brokerage accounts you can look into to meet your financial goals. You may even want to have multiple accounts to serve different purposes. We’ll go over how each one works, plus help you decide which might be right for you.
1. Standard brokerage account
A standard brokerage account is the most common. With a standard cash account, you can access a variety of investments, like dividend stocks, ETFs, mutual funds, different types of bonds and more, using money from your bank account. It offers flexibility and lets investors be in control: you can trade, deposit, withdraw or shut down your account at any time. These accounts are taxable. However, you may be able to offset those costs with tax loss harvesting.
For standard accounts, your risk is limited to cash you have on hand, which can keep you from going into debt. However, your potential gains are also limited to opportunities you can afford with cash. Many people consider these accounts the best for beginners looking to minimize their risk.
2. Margin brokerage account
A margin brokerage account works similarly to a standard account with one major difference: you can borrow money from the brokerage account to buy investments. These loans are known as “margin”. One main con of a margin account to be aware of? You’ll have to pay interest on the loans borrowed. They also may have higher account minimums.
Margin accounts may allow you to earn potentially better returns, since you are borrowing additional funds that may potentially give you access to different investment opportunities vs a cash only account—however, they also expose you to a higher risk of bigger losses.
3. Managed (discretionary) brokerage account
Discretionary accounts, also known as managed brokerage accounts, give professional investment advisors the agreement based permission to execute transactions on their own, without checking with you first. These may be taxable accounts that work like margin accounts or standard cash accounts.You maybe paying taxes on capital gains.Typically, the advisor will use a certain investment strategy that the client will be aware of, and take into account your investment goals when making investment decisions. These may be taxable brokerage accounts.
If you feel like you want a professional to manage your money for you—maybe because you don’t have time to keep up with the markets, or because you don’t trust yourself to be unemotional with your money—this could be a good choice for you. This way you don’t have to worry about watching daily changes in the markets. However, you should be ready to place a lot of trust in someone else.
4. Retirement brokerage account
A retirement account has special tax status—money grows in the account tax-deferred or tax-free. 401k accounts and traditional and Roth IRAs are examples of common retirement accounts. In many cases, you can get additional tax deductions for money deposited. However, withdrawals are usually limited until the investor reaches a certain age. So these are not great choices if you want to withdraw money in the near future. They’re really meant for helping in retirement planning.
5. Education brokerage account
Education accounts are commonly used to fund academic related expenses. One common example is a 529 savings plan. These accounts are tax-advantaged, though not completely tax free. However, withdrawals are tax-free if used to cover school expenses: tuition, books, room and board. These are great accounts to set up for children or grandchildren to fund their future education while investing funds in the meantime.
6. Custodial brokerage accounts
If you want to set up an investment account for a child without handing over the reins just yet, a custodial account is for you. Though held in the child’s name, these accounts are managed by an adult custodian, until the age of maturity (18 or 21, depending on the state).
How to choose a broker?
Since you must open a brokerage account with a brokerage firm, it’s important to consider the different types of brokers to figure out which is right for you.
1. Full-Service Brokers
Pro: Full service brokerages are very hands-on: they often have their own investment banking and research departments to provide the latest analyst recommendations, products and access to IPOs. You may be assigned to a personal banker in charge of your account.
Con: However, with all of this personalized advice comes a big con: very high commission rates. They may also charge an annual fee.
A full-service broker may be a good option for well-off individuals who want to manage all of their money, including personal loans, in one place.
2. Discount Brokerages
Pro: These days, most discount brokers offer commission-free trading. The platforms tend to have a lot of trading and research tools, since they cater to active investors and day traders. Many large discount brokers have direct-access trading platforms as well as physical offices with financial advisors.
Con: You may not get as much hands-on advice as you would from a full-service broker.
A discount brokerage is a good option for investors who want to save money on trading and don’t need as much personalized advice.
3. Direct-Access Brokers
Pro: Direct-access brokerage firms are also known as day trading brokers, catering to day traders and active investors. Speed and access are the top pros, and these firms often allow point-and-click executions and programmable hot-keys. Complex stock and options orders can be placed on these platforms.
Con: Sometimes the platforms carry a monthly fee composed to cover software and exchanges. To keep overhead low and pass on cheaper rates, online brokers usually don’t provide physical office locations for customers. These types of firms may give investment advice via a robo-advisor that works using algorithms along with human supervision.
A direct-access broker is a good option for people who want to invest exclusively from their mobile devices or people who are interested in new technology that analyzes financial interests via algorithms and data.
4. Public.com
Public is a different kind of brokerage that makes you part of an investing community, with access to all the knowledge you need to make smarter investing decisions. From information for beginners looking to learn how to invest, to explainers on cryptocurrency, learning about portfolio diversification more, Public makes sure you have everything you need to get started. Plus, get access to tools for more advanced investors: experts take you through daily market moves, sit in on Town Halls where you’ll hear directly from company leaders, read in-depth research and more.
Public.com is a good option for anyone who wants to make informed investing decisions and learn more about complex market moves.
Public never charges commissions to place your trades.
Without commissions, many other retail brokers now rely on Payment for Order Flow (PFOF) to make money. PFOF is a much-debated practice where brokerages send their customers’ trades to market makers for execution in exchange for rebates. PFOF is problematic because it isn’t transparent and also creates a conflict of interest; the brokerage is paid to send trades to market makers, but those market makers may not offer the best prices for the customer.
Public is officially PFOF-free. In the interest of aligning our business model with the best interests of our growing community of investors, we no longer accept PFOF.
How to sign up for a brokerage account?
Since many brokerage firms offer brokerage accounts, a future investor needs to investigate which one makes the most sense for her. There are two common types of account providers: online and managed. An online brokerage account allows an investor to manage her investments through a website or app. A managed brokerage account provides an investor with a human or robot investment manager who advises what securities are best for her portfolio. A managed account is ideal for someone who wants to take a more hands-off approach to investing. An investor should also compare commission fees and minimum deposits required by different brokerage firms. Managed accounts often have trading fees, which may not be economical for some investors.
What do you need to open a brokerage account?
After an investor decides what brokerage firm and account best suit her needs, the sign-up process becomes fairly straightforward. It may vary, but most brokerage firms require an applicant to provide:
- A social security number
- A government licensed ID
- Employment status and documentation to support this like a signed job offer or a W2
- Financial information, and an overview of investment objectives.
- Information for your checking account
- Once the application is approved, an initial deposit of funds will be required to start investing. The initial amount of money required will vary depending on your broker, so look into this requirement when shopping for brokers.
What is a broker-dealer?
A brokerage firm acts as a broker when it engages in trades on behalf of customers and acts as a dealer when it engages in trades on behalf of itself. Most brokerage firms function as both brokers and dealers and are therefore referred to as broker-dealers. Since broker-dealers facilitate trading, they are an essential part of the securities market. In order to set up a brokerage account, a customer will often engage with a brokerage firm that functions as a broker-dealer.
Opening a brokerage account with Public.com
Open to the Public Investing, Inc. (Public) is a FINRA registered broker dealer that gives you exclusive tools to help you make smarter investment decisions to meet your financial goals. You can diversify your portfolio by investing in many different asset classes, from crypto and NFTs to collectibles and ETFs. Or, just stick to stocks. Whatever works best for you!
With Public, you’re part of a community. You’ll get insights from millions of investors, company leaders, analysts and creators. You’ll have all the resources you need to meet your investing goals right at your fingertips. The market can be confusing, but we make it easy to understand, with tools that let you visualize how and why the market or individual stocks are moving.
Public offers many resources for beginner investors. For instance, you can invest in crypto, ETFs, stocks and more no matter how much money you have available with Fractional Investing. That way, you can buy slices of stock. We also help inform your investing decisions with exclusive research reports, podcasts to help you understand the market’s daily moves, and more. If an opportunity arises and you want to invest immediately, without waiting for money to transfer into your Public account, you can take advantage of Instant Transfers and never miss a beat.
If you have an existing portfolio you want to transfer to Public.com, you can easily do so right from your phone. Learn more about transferring your portfolio here.
Check here to make sure you meet the basic qualifications for opening an account.
Bottom line
At the end of the day, a brokerage account is necessary for anyone interested in investing in stocks, bonds, and mutual funds. There are many different brokerage firms and accounts available to investors, so it is important to compare different fees and services offered before signing up for an account. Whether an investor requires a hands-on or hands-off approach to investing, will determine if she wants an online or managed account. Additionally, an investor will have to choose between a cash and margin account depending on whether she wants to use available cash or borrowed funds to pay for trades. Regardless of the type of account an investor chooses, setting up a brokerage account is an important step toward building an investment portfolio.
Frequently asked questions
What is the best brokerage account for beginners?
A standard brokerage account is often considered the best for beginners, because it is simple, and you won’t risk more than you have on hand.
Can I withdraw money from a brokerage account?
This totally depends on what kind of brokerage account you sign up for. You can make withdrawals from most accounts, but there may be tax implications, especially for retirement accounts like Roth IRAs or educational accounts.
What are the 3 types of brokerage accounts?
There are actually more than three types of brokerage accounts—see our article for the main six. However, there are three types of brokerage firms: full-service, discount and direct-access.
What type of brokerage account should I use?
This totally depends on your financial goals, asset allocation, and other individual factors. Check out our breakdown above for a rundown of different brokerage accounts and what they’re used for.