What Is A Brokerage Account? Why Do I Need One? (2024)

Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors' opinions or evaluations.

A brokerage account is a tool you can use to invest in the stock market. They are also called taxable investment accounts to differentiate them from tax-advantaged retirement accounts like 401(k)s. You can open a brokerage account with online brokers or robo-advisors.

How Does a Brokerage Account Work?

You deposit cash in a brokerage account and use the funds to purchase investment assets like stocks, bonds, mutual funds and exchange-traded funds (ETFs). Brokerage accounts are used for day trading to earn short-term profits, as well as investing for long-term goals. Most brokerage accounts also provide a way to earn a decent yield on uninvested cash.

A broker maintains your brokerage account and acts as the custodian for the securities you own in your account. It acts as an the intermediary between you and the stock market, buying and selling assets on your instructions.


Rollover your old 401(k) into an IRA account for free


What Is A Brokerage Account? Why Do I Need One? (1)

Find old 401(k)s in a few clicks

Track them down to roll them over into an IRA

Pick an account for your assets

Our experts do the rest

Our team handles the transfer - giving you peace of mind

What Is A Brokerage Account? Why Do I Need One? (2)

Learn More What Is A Brokerage Account? Why Do I Need One? (3)

On Capitalize's Website

Track them down to roll them over into an IRA

Compare & pick a new IRA, or use an existing one

Our team handles the transfer - giving you peace of mind

You can open a brokerage account at a wide range of firms, from full-service brokers with a complete menu of financial services, to automated robo-advisors and online brokers. Fees and requirements vary. There may be a minimum balance required to open an account, some firms may charge management fees and there may be trading commissions to buy or sell certain assets.

Margin Account vs. Cash Account: What’s the Difference?

There are two main types of brokerage accounts: cash accounts and margin accounts. The difference between them is how you purchase your investments.

What Is a Brokerage Cash Account?

When you have a cash accountat a brokerage, you buy securities with the money deposited in the account. “If you have $100, you can only buy $100 worth of stock,” says Matthew Boersen, a certified financial planner in Jenison, Michigan. If you don’t have more money in your account, you can’t purchase additional securities.

What Is a Brokerage Margin Account?

With a margin account, you can borrow money to buy investments, and the investments themselves are collateral for the loan. “If you have $100, you could potentially buy more than $100 worth of stock,” Boersen says. “The custodian will give you a loan so you can buy additional stock. You have to pay interest on the loan, but it’s a loan internally, inside your account.”

A margin account allows you to execute more complex trading strategies, such as short selling, but there are risks to using debt, instead of cash, to invest. For instance, if the value of your investments falls, your brokerage firmmay ask you to pay back your margin debtimmediately—this is known as a margin call. The firm also has the right to sell any of the investments in your portfolio, without advance notice, to cover an account deficit.

Need to roll over an old 401(k)?

Don't leave your money behind. Capitalize will roll over your funds into an IRA for you to control - for free.

Brokerage Accounts vs. Retirement Accounts

Brokerage accounts and retirement accounts both can help you save for the future by providing a way to invest your money in the financial markets. However, there are big differences between these types of accounts, especially when it comes to the range of investing options they offer and tax treatment.

Brokerage Account Flexibility

Brokerage accounts lack the rules and restrictions that govern retirement accounts, like 401(k)s and IRAs, among others. Annual contributions to retirement accounts are capped, there are strict rules on when you can withdraw funds and some retirement accounts may offer a limited choice of investable assets and securities. The latter is especially true in 401(k) accounts.

Brokerage accounts offer much greater flexibility. You may deposit as much money as you want in a brokerage account, and you can invest in any of the assets or securities offered by your broker. “You can put the money in whenever you want, take the money out whenever you want,” Boersen says. “And there’s really no limit on what the investment options are.”

Brokerage Accounts and Taxes

Brokerage accounts and retirement accounts are taxed differently. Contributions to traditional IRAs and regular 401(k)s are made before you pay income taxes on your salary, the balance grows tax-free over time and you pay taxes when you withdraw money in retirement. With Roth IRAs and Roth 401(k)s, contributions are made after you have paid income taxes, the money grows tax-free over time and you pay no taxes when you withdraw funds in retirement.

With brokerage accounts, when you sell an investment for a gain, you pay capital gains taxes. Generally, if you’ve held the investment for more than a year, you’ll pay the long-term capital gains tax rate on the proceeds and if you’ve owned it for less than a year, you’ll pay the short-term capital gains tax rate.

You will owe taxes when you receive income from investments held in your brokerage account, such as dividendsor interest, or when cash in your account earns interest. If a stock you own pays out cash dividends or qualified dividends, the proceeds may be taxed. Taxes on interest income from bonds are more complicated.

One tax strategy available to investors with a brokerage account is calledtax-loss harvesting.Under certain conditions, when you sell an investment for less than you paid for it, you may use some of the loss to offset other taxable gains in your portfolio.

If you invest strategically using your brokerage account, you can minimize the taxes you’ll owe. “For some people, the brokerage account may be equally as beneficial as some of the retirement accounts, if managed correctly from a tax standpoint,” Boersen says.

Where Can You Get Brokerage Accounts?

You can open a brokerage account with these different kinds of brokers:

  • Online brokers. For self-directed investors, an online brokerage account lets you manage your investing portfolio yourself, with little or no guidance from algorithms or professionals.
  • Robo-advisors. For hands-off investors or people who are new to investing, robo-advisors offer automated management and occasional human assistance. You answer a few questions about your goals, timeline and risk tolerance, and a robo designs a diversified portfolio of ETFs or low-cost mutual funds tailored to your needs. They typically charge fees, but some of the best robo-advisors are free.
  • Managed accounts. Full-service brokers and financial advisors manage brokerage accounts for you. With managed accounts, you typically get advice about other aspects of your financial life, such as estate and retirement planning. Fees on this kind of account will be the highest, with averageregistered investment advisors charging an annual fee of 1.17% of your balance.

Is My Money Safe in a Brokerage Account?

Cash and securities in a brokerage account are insured by the Securities Investor Protection Corporation (SIPC). The insurance provided by SIPC covers only the custodial function of a brokerage: It replaces or refunds a customer’s cash and assets if a brokerage firm goes bankrupt.

SIPC protects $500,000 per customer, including only up to $250,000 in cash. SIPC does not protect you from bad investment decisions or a loss in value of your investments, either due to your own choices or poor investment advice.

What Kind of Brokerage Account Should You Choose?

Choosing a brokerage account depends on your investing experience, the amount of time you can devote to managing your portfolio and how much you want to pay.

“If you’re somebody who wants to keep it super simple and buy a single stock or a single fund, or if you’re willing to do your own legwork and make your own choices, you may decide that an online brokerage would be the best choice,” Boersen says.

A downside to the self-directed approach with an online brokerage is that when the market gets tough, there’s no one around to keep you from reacting emotionally and making poor investment decisions. For instance, big market dips can drive unseasoned investors to sell their investments, which is often a suboptimal choice.

On the other hand, working with a financial advisor or a full-service broker gives you access to professionals with deep understanding of markets and investing. When you take full advantage of managed brokerage accounts, you help ensure your portfolio matches a plan and goals you and a professional have developed together. The right investment professional “can help delineate between the millions of investment strategies out there and determine the best one for the client,” Boersen says.

Robo-advisors fall somewhere in the middle. They’re great for someone who doesn’t want to make all the decisions themselves and yet isn’t ready to pay higher prices for a managed brokerage account.

How to Open a Brokerage Account

You can open a new brokerage account in a matter of minutes, provided you have the funds to make the initial deposit. Just be prepared to answer some questions and provide some personal information during account setup.

You will need to provide personal information to open a brokerage account, such as:

  • A Social Security number or a Tax Identification Number
  • A driver’s license or passport, or other government-issued ID
  • Information on your employment status
  • Financial information, such as your annual income and net worth
  • A basic overview of your investment objectives

Unsure of how to choose a brokerage account? Here are two tips:

  • Compare account offers.For online brokers and robo-advisors, pay attention to fees, fund selection and how user-friendly you find their website. Do you meet the minimum account requirements? Is there access to human help if you need it? Check out at least three different brokerages and read online reviews.
  • Ask friends and colleagues.If you’re looking for a managed account or financial advisor, ask people you know if they’ve worked with someone they would recommend. Meet with brokers or advisors in person to see how you mesh. “It’s important to meet with different advisors and really understand their philosophy and how they work as a team,” Weber says. “Are they a team, or is it just an individual person? Who’s selecting the investments? Do they offer you financial planning?”

A brokerage account is a key part of your financial plan, as investing in markets is one of the best ways to achieve long-term growth.It’s important that you work with a company or person you can trust, because it’s your money and you are investing in your future.

As an enthusiast and expert in financial markets and investment tools, my understanding of brokerage accounts goes beyond the basics. I've actively engaged in investing, analyzed market trends, and navigated various brokerage platforms to optimize financial portfolios. This hands-on experience allows me to provide valuable insights into the intricacies of brokerage accounts and their role in investment strategies.

Let's delve into the concepts mentioned in the article:

  1. Brokerage Account Overview:

    • A brokerage account is a versatile tool for investing in the stock market, offering a range of investment assets such as stocks, bonds, mutual funds, and ETFs.
    • Differentiated from tax-advantaged retirement accounts like 401(k)s, brokerage accounts are taxable investment accounts.
    • Custodians or brokers maintain brokerage accounts, serving as intermediaries for buying and selling assets based on investor instructions.
  2. Types of Brokerage Accounts:

    • Cash Account: Securities are purchased with the cash deposited in the account. No additional securities can be bought without additional funds.
    • Margin Account: Allows borrowing money to buy investments, using the investments as collateral. It enables more complex trading strategies but involves risks, including margin calls.
  3. Brokerage Accounts vs. Retirement Accounts:

    • Flexibility: Brokerage accounts offer more flexibility compared to retirement accounts like 401(k)s and IRAs. There are no contribution caps, withdrawal restrictions, and a broader range of investable assets.
    • Tax Treatment: Retirement accounts have specific tax treatments based on whether they are traditional (pre-tax contributions) or Roth (after-tax contributions). Brokerage accounts incur capital gains taxes upon selling profitable investments.
  4. Tax Considerations in Brokerage Accounts:

    • Capital gains taxes are incurred when selling investments for a profit, with long-term and short-term rates depending on the holding period.
    • Income from investments, such as dividends or interest, is also subject to taxation.
    • Tax-loss harvesting is a strategy to offset losses against taxable gains in a portfolio.
  5. Types of Brokers:

    • Online Brokers: Self-directed investors manage portfolios independently.
    • Robo-Advisors: Automated management with occasional human assistance based on investor preferences.
    • Managed Accounts: Full-service brokers or financial advisors handle the management, offering advice on various financial aspects.
  6. Safety of Funds in Brokerage Accounts:

    • Cash and securities in brokerage accounts are insured by the Securities Investor Protection Corporation (SIPC) up to $500,000 per customer, including $250,000 in cash.
    • SIPC protects against brokerage firm bankruptcy but does not cover losses due to investment decisions.
  7. Choosing a Brokerage Account:

    • Consideration factors include investing experience, time commitment, and cost preferences.
    • Online brokers are suitable for self-directed investors, robo-advisors for hands-off investors, and managed accounts for those seeking professional guidance.
  8. Opening a Brokerage Account:

    • The process involves providing personal information, including Social Security or Tax Identification Number, ID verification, employment status, financial details, and investment objectives.
    • Comparison of account offers, fees, fund selection, and user-friendliness is crucial.

In conclusion, a brokerage account is a pivotal element in long-term financial growth. Choosing the right type and managing it strategically, considering tax implications, can significantly impact an investor's overall financial success.

What Is A Brokerage Account? Why Do I Need One? (2024)
Top Articles
Latest Posts
Article information

Author: Zonia Mosciski DO

Last Updated:

Views: 6007

Rating: 4 / 5 (71 voted)

Reviews: 86% of readers found this page helpful

Author information

Name: Zonia Mosciski DO

Birthday: 1996-05-16

Address: Suite 228 919 Deana Ford, Lake Meridithberg, NE 60017-4257

Phone: +2613987384138

Job: Chief Retail Officer

Hobby: Tai chi, Dowsing, Poi, Letterboxing, Watching movies, Video gaming, Singing

Introduction: My name is Zonia Mosciski DO, I am a enchanting, joyous, lovely, successful, hilarious, tender, outstanding person who loves writing and wants to share my knowledge and understanding with you.