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No matter your investment goals – retirement, hoping to get lucky with a few good stock picks, or simply looking for somewhere to stash excess cash – the stock market is more accessible than ever for everyday investors (and soon-to-be investors).
That’s mainly due to the technological revolution that changed the way brokerages do business – though many of today’s younger investors never experienced the old days with stale price data, high commissions, and often frustrating user experiences.
Luckily, investing is much simpler today, and, in many cases, you can get started with just a few dollars – you just need to open a brokerage account. But what is a brokerage account, and how does it work?
Key Takeaways
- Investing is one of the best ways to grow wealth long-term.
- A range of accessible brokerage options make investing easy.
- You’ll need to provide personal data to open a brokerage account, but you won’t be able to do so if you’re a minor (unless an adult co-owns the account).
- Picking the best brokerage depends on your investment goals and trading knowledge.
- Show Full Guide
What Is a Brokerage Account, and How Does It Work?
A brokerage account is where you buy and sell securities and assets like stocks, bonds, mutual funds, ETFs, and (with some brokerages) more speculative options like crypto.
You can deposit and withdraw money into and from your brokerage account, much like a savings or checking account. However, it’s important to note that cash held in a brokerage account isn’t always eligible for FDIC deposit insurance.
Types of Brokerage Accounts
While a brokerage account generally refers to a standard trading account with few restrictions, the term applies to a much more comprehensive range of brokerage accounts, including:
- Retirement accounts, such as Traditional and Roth IRAs, with withdrawal and annual deposit restrictions. These accounts are tax-advantaged, though, unlike standard trading accounts.
- Joint accounts held in multiple users’ names, such as a joint account owned by a married couple.
- Education savings accounts, which are tax-advantaged options to help children save for higher education.
- Discretionary accounts offering access to designated investment professionals to manage money on your behalf.
There are a few more types, but generally, these will apply to most users interested in knowing what kind of brokerage account they should open.
How Do Brokerage Accounts Work?
This diagram shows the flow of funds and activities between you (the investor) and your broker account:
Person (Investor): The individual who wants to invest opens a brokerage account with a brokerage company.
The investor deposits assets, typically cash, into the brokerage account. This deposit represents the funds available for investment.
The investor provides instructions to the brokerage company on how to invest the deposited funds. This can include buying or selling shares, bonds, or other financial instruments.
- Executing Trades: The brokerage company acts on behalf of the investor to execute the investment instructions. This involves buying and selling securities as directed by the investor.
- Charging Fees: The brokerage company deducts fees for its services. These fees can be transaction-based, a percentage of assets under management, or a flat rate.
The investments made through the brokerage company are held in the brokerage account. This account keeps track of all transactions, holdings, and any changes in the value of the investments.
- Selling Assets: The investor can sell assets held in the brokerage account. When an asset is sold, the proceeds are deposited back into the brokerage account after deducting any applicable fees.
- Withdrawing Funds: The investor can withdraw funds from the brokerage account as needed. Withdrawals can be made in cash or transferred to a bank account.
The investor monitors the performance of their investments through the brokerage account. The brokerage company typically provides tools and reports to help investors track their portfolios and make informed decisions.
This cycle of depositing assets, instructing trades, and managing investments continues as the investor seeks to grow their portfolio or meet their financial goals.
The brokerage account serves as a centralized platform for handling all investment-related activities.
How to Open a Brokerage Account: A Step-by-Step Guide
Gather Basic Information
Opening a brokerage is easy; most reputable providers will collect some basic information, including your social security number, mailing address, and similar stats, to prevent fraud.Consider Initial Deposit & Incentives
From there, you generally won’t need an initial deposit to get started. However, note that some brokerages offer incentives like free stocks if you deposit a set amount within a few days of opening an account.Meet Basic Criteria & Determine Eligibility
To start, you’ll need to meet some basic criteria – the first of which is likely foremost in your mind if you’re a younger investor: How old do you have to be to open a brokerage account? You must be 18 to open a brokerage account, though it’s possible to open one for minor-aged investors in some cases. If you’re in that camp and wondering how to open a brokerage account for a child, different brokerages offer different options – but the account will generally need to be maintained in an adult’s name rather than solely allocated to the child.Answer Preliminary Questions
If you’re over 18, you’ll answer a few preliminary questions to open your brokerage account. These may include:
- Social security number and personal data like the address to prevent fraud.
- Net worth and income questions.
- Investment history questions – these come into play if you want to enable margin or options trading, so be sure to be honest and fully understand the different opportunities available before committing.
- Some standard disclosures, such as foreign asset holdings, whether you or your family works for a publicly traded company, etc.
- Sometimes, the brokerage may ask you to scan or send a picture of your driver’s license or similar ID for verification.
Fund Your Account
Once you’ve opened a brokerage, you’ll fund the account via a third-party bank transfer, check deposit, or automated customer account transfer service (ACATS).Start Trading
From there, you’re ready to trade! Remember to develop a trading strategy before randomly picking stocks if you’re new to investing.
You may want to see if your brokerage offers a “paper trading” platform; these platforms let you invest notional money using actual market data, so you can test investment strategies and get comfortable with the interface before continuing with real cash.
How to Fund a Broker Account
If you already hold stocks with a different brokerage, you can transfer shares via the automated customer account transfer service. An ACATS transfer usually takes a week or two to finish, and you won’t be able to touch the stocks while they’re mid-transfer. Also note that many brokerages charge an “ACATS out” fee, meaning your losing brokerage makes you pay to transfer elsewhere. Still, most brokerages will reimburse “ACATS in” transfers up to a certain amount, so check fee structures on both sides before pulling the trigger.
Once you’ve funded your brokerage account, you’re ready to buy some stocks or other assets! The trading interface varies from brokerage to brokerage.
Still, they’re generally intuitive, and the platform should have some instructional documentation or videos available to help you place your first few trades.
Remember that when buying and selling stocks, the brokerage acts as an intermediary rather than a buyer or seller. This means the platform connects you to a buyer or seller on the other side of the trade while offering accurate pricing data.
There are some exceptions, as in the case of fractional investing with some brokerages. Still, the brokerage generally just facilitates the trade – so don’t call them if you’re unhappy with your portfolio’s performance.
How to Choose a Brokerage Provider: Expert Tips
Your brokerage choice depends mainly on your investment style, needs, and general trading experience. Here are some considerations you’ll need to weigh before picking a brokerage provider:
- User Interface: Some app-centric brokerages like Robinhood are intuitive and easy to navigate. However, this often comes at the expense of deeper analytics and stock research data that some providers offer.
- Trading Options: All brokerages will offer commonly traded stocks, bonds, and ETFs; however, some limit access to over-the-counter (pink sheet) stocks, mutual funds, foreign exchange trading, and similarly complex or speculative assets. If you intend to go all-in on penny stocks, ensure your brokerage offers them.
- Fees: Though nearly all major brokerages offer no-commission trading for standard stocks, some charge fees for options trades, pink sheet stocks, and other less common assets. It’s a good idea to check the brokerage’s fee schedule before making your choice.
- Additional Features: Different providers offer a range of extra features, like charting tools, research portals, backtesting platforms, and similar advanced user tools. Even if you’re a newer investor, maximizing your platform’s features goes a long way toward ensuring you stay with the provider for the long run rather than running into limitations as you progress.
Requirements for Opening a Brokerage Account
Beyond the basic age requirement, brokerages will require a wide range of personal information, though the process is generally streamlined and easy to complete.
Some additional decisions and considerations you’ll need to make as you open a brokerage account include:
- Whether you want to trade on margin, meaning that the brokerage effectively lends you money to trade. This can be as simple as margin to reduce settlement periods (how long you have to wait after selling to use the cash) or as complex as opening leveraged investment positions to maximize gains. Leverage and margin can be dangerous, though, so if you’re a newbie, it’s usually best to stick with a cash account.
- Determine your investment goals, experience, and risk tolerance levels – this will drive the brokerages’ decision-making process when it comes to advanced features like options trading.
- You’ll have the opportunity to designate a beneficiary to the account; this means the account automatically transfers to someone else in the event of your death. In most cases, this is a good way to ensure your assets remain available to loved ones without the hassle of going through probate.
- Whether you want to receive account statements and communications digitally or through snail mail.
Different brokerages demand different requirements, but generally, they’ll follow along these lines, and there aren’t tricky hurdles to opening your new investment account.
The Bottom Line: Should I Open a Brokerage Account?
Few opportunities to establish and build long-term wealth are available to as many people today as stock market investing, and opening a brokerage account is the first step toward doing so.
Be sure to research the best options extensively and select one that fits your investment style, preferences, and general tech-savviness. Various options meet many investors’ needs, so finding a suitable brokerage won’t take you long.
Once your brokerage account is open, be sure to develop a well-thought-out investment strategy. Avoiding this important next step is the fastest way to reduce your brand-new brokerage account to zero.
Do your own research and always remember your investment decision depends on your attitude to risk, your expertise in financial markets, the spread of your portfolio, and how comfortable you feel about losing money.
The information in this guide does not constitute investment advice and is meant for informational purposes only.
