Brokerage Account: The flexible account you need for your investments.

Are you planning to start investing in stocks, bonds, and other investment products? A brokerage account might help you make things easier.


If you plan to get on board the investment trend to reach your financial and other pre-retirement goals, you might want to open a brokerage account. While you can always opt to buy stocks, bonds, mutual funds, and other investments on your own, still, opening a brokerage account to start your investments is a great deal for you not to be overwhelmed. And if you are a beginner then, it is more reason for you to begin opening a brokerage account because while financial information and research are readily available, these things can only do so much; in the end, brokerage accounts can give more perks and benefits that you will surely welcome.

1. What is a brokerage account?

A brokerage account is one kind of investment account that enables users or clients to buy and sell securities such as stocks, mutual funds, bonds, ETFs, and others. Like banks, brokerage accounts will allow you to transfer money in and out of it. But unlike the former, brokerage accounts give you access to the stock market and other investments to further explore investment opportunities.

2. How does a brokerage account differ from a retirement account?

A brokerage account could be counted as a flexible type of account that allows users or clients to manage their investments and money more freely. You might also hear others calling brokerage accounts as taxable accounts because investment income in this type of investment account is taxed as a capital gain.

A brokerage account is unlike retirement accounts like IRA that has a different set of tax rules. Since there are tax advantages, when compared to retirement accounts like IRA, brokerage accounts have no restrictions when it comes to income, investment options, limited additions, access, etc. Clients can take their money for whatever reason they may have whenever they want; there are even no requirements that will force them to do so. This freedom in access, options, income, and funding is the reason why it was classified as a taxable account.

To give you a summary of the differences between a brokerage account and a retirement account, you can look and refer to the account comparison table below.

Brokerage Account

Retirement Account

Purpose of account

Stock Trading, Options Trading, Investing on other securities such as bonds, mutual funds, ETFs, etc.

Long term-growth and retirement savings

Fees

No fees to start and maintain your account.
Some charges management fees
Some have trading commissions

No fees to start and maintain your account

Taxes

Capital gains tax on investment income

Specific tax benefits depending on the IRA

Withdrawal

No limits or penalties. Clients can withdraw their money anytime.

Penalties for withdrawing before specific age, unless certain requirements for exceptions were met

Contribution limits

Has no limit.

Has contribution limits


3. How does a Brokerage Account work?



It is easy to look for brokerages account; what is hard is picking the best one for you. There are many licensed brokerages firms you can choose from, but they are mainly divided into three categories; the pricy full-service brokers and financial advisers that offer accounts managed by professionals, the cheaper robo-advisors that do algorithmic investing and requires minimal human assistance, and lastly, the online brokers which are the most inexpensive and lets self-directed investors manage investments themselves.

Most brokers allow you to open an account online, and most of the time, you do not need an enormous amount of money to do so. Upon opening an account, you are not required to have an initial deposit, but you need to fund your brokerage account before you can invest in anything. That is the only time you can purchase investments.

Funding a brokerage account is easy. For those who have saving or checking accounts, they can fund their accounts via transferring money. For those with existing brokerage accounts transferring money online from the preexisting account to the new one is also an option. People can also mail in a check.

The money and investment in your brokerage account are yours, and you can sell your investments anytime. Since you employed the services of a brokerage firm, the brokerage will maintain your brokerage account and act as a custodian for the investments you hold in your account. The brokerage firm will also serve as the intermediary between you and the market and the investments' trading, buying, and selling.

There is no limit on how many brokerage 3accounts you may want to open nor the money you can pool to fund a taxable brokerage account.

4. How to open and start a brokerage account?

Opening a brokerage account is easy and is almost free. Some even do not require an initial deposit. Most firms allow prospective investors to open an account online for as long as they meet specific requirements such as age. Opening an account online means prospective investors need to fill up an application that takes less than 20 minutes to finish.

So, if you want to create a brokerage account and start investing, you may follow the seven simple steps below.


1. Look for a brokerage firm. In opening a brokerage account, you should first search for firms that offer this kind of investment account. Once you are done looking and have picked the brokerage firm of your liking, that is the only time you can genuinely start opening a brokerage account.

2. Understand the Fees

Understand the different fees associated with brokerage accounts such as commission, loads, inactivity fees, transfer fees, etc. While you can always place this at the back of your head, you should understand them before committing to opening a brokerage account.


3. Open an account online. Go to the website of the brokerage firm you chose. Most brokerage firms have online applications, so this would not become a hassle. In setting up your account, you need to fill the application to the best of your knowledge. Provide true information.

Some of the information you need to provide are:

·      A Social Security Number or a Tax Identification Number

·      Address and contact number

·      Any valid and government-issued ID

·      Your financial objectives and Risk Tolerance

·      Your financial profile includes information about your annual income and net worth

·      Employment Status and Occupation


4. Make your Decision

There are many decisions to make upon opening a brokerage account, but there is one decision you must prioritize. You need to decide on the kind of account you will open; would it be a cash or margin account? A cash account requires you to pay the total amount of your purchase. In this account, you cannot borrow funds from the brokerage firm to pay for your transactions. On the contrary, a margin account allows you to borrow funds from your brokerage firm to pay your transactions. And to be safe, the firm will treat your investments as collateral. On top of these, some require you to pay interest. So, if you are a beginner, you better stay with a cash account.


5. Initiate a Deposit or Fund Transfer

To start your investment, initiate a deposit or fund transfer. Without a deposit or fund transfer, you cannot buy stocks, bonds, or mutual funds. Depositing or transferring funds to your brokerage account is not complicated. You only need to link your bank account to it.

6. Verify your transaction

For added security, some brokers require you to verify a fund transfer. The broker will deposit few cents in your bank account, and you need to confirm the transaction by letting the brokerage know the amount you received.


7. Start!

Upon successfully opening an account, you can start investing.

5. 5 Highly Recommended Brokerage Firms


With so many brokerages available to you, deciding which to "use" may be challenging. So, here are 5 of the best-rated brokerage firms you can choose.

1. Ameritrade

Ameritrade is a good "partner" for beginners. It requires $0 as account minimum and has 0% commission on stocks and ETFs. It has though a $0.65 commission per option contract. The education feature of Ameritrade is also designed to make new and beginning investors comfortable.

2. InteractiveBrokers

InteractiveBrokers is a brokerage best for advanced traders, but if you really want to do transactions through them, it is still good. They charge low fees at around $0.005 per share for the Pro platform or 1% of the trade value. They even charge $0 for IBKR Lite.

3. Charles Schwab

If you want to give more emphasis on ETFs, Charles Schwab is best suited for you. Charles Schwab also manages transactions for stocks and others, but the way they handle ETFs through their StreetSmart Edge ETF screener tool is fantastic. Like Ameritrade, opening an account in Charles Schwab requires $0. They have 0% commission on stocks and charges only $0.65 per options contract

4. Tastyworks

Tastyworks is another brokerage firm beginners can choose from. Beginners may find their platform overwhelming, but the tools built into it are worth it. It is also one of the best for low costs. The account minimum in this brokerage firm is $0. There is also a $0.00 fee on stock trades.

5. Fidelity

Fidelity is among the best-rated brokerage firms. It offers clients delightful tools and low fees. There is a $0 minimum for opening an account. Fidelity charges $0 for stocks and $0.65 per options trade contract.

6. 5 Tips when investing through a brokerage account

1. Compare their fees. Compare the fees of brokerage firms; it is best to go for those that offer the same services but for lower commissions.

2. Read Reviews. There are many articles available online. That provide insights about the perks, features, benefit of using each brokerage firm. Read these so you can assess the pros and cons of each firm.

3. Know what you want. Starting a brokerage account is not complicated, but you are still investing in this account, so be mindful of where you are investing. You might want to invest in the things you want. Have a plan of what to buy. You might also consider investing in mutual funds and ETFs if you do not have time to evaluate companies.