What Is a Brokerage Account? How to Get Started Investing

A brokerage account is used for making investments, and acquiring one will be your first step to start investing.

A brokerage account can be opened with a brokerage firm or an investment company, and it’s used for purchasing and selling taxable investments with your money. Unlike a typical retirement account like a 401k or IRA, when you invest in a brokerage account, your investments are considered taxable every year and also when you sell you may have to pay capital gains on any investment gains.

For those who either max out their retirement accounts or just want more access to their money (no age requirement of 59 1/2 like a retirement account), a brokerage account may be a good fit to make investments into things like stocks, bonds, and mutual funds which all have the potential to grow your money faster than a savings account would.

If you want to open up a brokerage account, start by reviewing your overall retirement accounts and goals and then review your budget to determine how much you can invest into a brokerage account and what you are investing the money for. Even though there is no lock up period (to age 59 1/2) like retirement accounts have, you still have to be clear what you are investing for as that will help you determine the right investment allocation and risk you can handle based on the goal.

How Does a Brokerage Account Work?

With a brokerage account, an investor uses their own money by depositing a check, electronic, or wire transfers. You can even transfer investments you already made with another broker to your new account. The broker or firm you work with should help explain this process, and they then use the deposited money to trade investments on your behalf.

To open an account, you’ll need identifying information such as your driver’s license and Social Security number. Some firms will often ask for proof of your income and what kind of investments you are looking to make. You must be at least 18 years old to open an account, but parents may also open accounts on behalf of their children if they’re minors.

It’s important for you to remember that you’re the owner of these investments, since they’re being made with your hard-earned money. A brokerage account is merely a middle man for completing and advising your transactions. At any time, you may pull out your money or invest more as you please.

How to Set up A Brokerage Account

You can set up a new brokerage account quickly online with your personal information. With larger firms, they may charge an initial deposit of $1,000 to $2,500 to open an investment account. Larger firms will also sometimes charge advisory fees for the accounts they look over, and some charge commission on each trade. However, it’s often that a brokerage firm will let you open an account for very little or nothing at all, but you must always have money to start investing.

Which Brokerage Account Is Right for You? 

It’s important to consider your financial goals so that you can choose the right type of investments to invest in within your new brokerage account.

Full-Service Brokerage Account

These accounts are for those who are looking to make larger investments. Full-service accounts are going to typically have a higher deposit requirement, but offer you a higher quality service. With an account like this, you are paying for the service of having someone watch over your investments and coach you through the process. Often times those looking over your account will decide what to invest for you, and then go over why they made those decisions with you.

Discounted Brokerage Account

This is just going to be a smaller account, for investing on a smaller scale. These investment accounts have cheaper rates so that if you would like to invest with less capital, you may still do so. They also have software that is simpler and easy to use, so that anyone can figure it out and make their own investments with less advising.

Online Brokerage Account

Another less expensive option if you are looking to invest more casually. Having the online option available gives you the ability to practice investing hands-on. Online investment accounts are easy to create and easy to use. They give you the freedom to choose how you invest and how often. These are also great if you would like to set up automatic investing, say every pay period, but bear in mind you must make these investment transactions on your own.

When you set up a brokerage account, you’ll be asked if you want to set up a cash or margin brokerage account. It’s typically a good idea to at least start with the cash-only account. Cash brokerage accounts require that you can deposit money in full before proceeding with any transactions. Only having your money involved is a much safer way to invest.

On the other hand, if you think you need more money to reach your investment goals and you’re confident in your investments, then you might want to look into a margin account. A margin account allows the broker to let you borrow cash from them with interest, allowing you to make more investments. Margin accounts are riskier than cash accounts because they involve loans, and are usually associated with larger investment accounts. Before you decide to invest with a margin account, be sure you can pay back what you borrow.

Do You Pay Taxes On a Brokerage Account?  

If you’re looking to invest for retirement, you may want to consider a retirement account that has tax advantages such as a 401k or IRA. Brokerage accounts are taxable, which means when you decide to take your money out of investments, your gains will get taxed at the current rates. The advantage to this account is that you can retrieve your money whenever you need to.

When you open a 401k or IRA for retirement, there are different rules about how your money is taxed. These accounts put restrictions and contingencies on your withdrawals. However, they do allow your investments to grow tax-free and are tax-deferred. This means you don’t have to pay taxes on the money you invest until it’s withdrawn in retirement. With some Roth IRA’s, the taxes are taken out when the money is invested, which can give you more confidence in the amount of capital you actually own.

Looking at the big picture, there are many kinds of investment accounts floating around. The best thing to do as a beginner investor is to decide what investments are best for your personal growth and finances. Everyone who is financially capable should be investing their money. If you decide a brokerage account is the best option for you, check out these great account options to get started growing your money.