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.
Once you take that step, a brokerage account becomes your financial tool to access the stock market and other investment options. With a brokerage account, you can buy and sell everything from individual stocks to exchange-traded funds (ETFs), bonds, and even mutual funds, all from one platform. It’s an essential account for anyone who wants to actively grow their wealth and make their money work harder than it would sit in a typical savings account.
But before diving in, it’s important to understand what a brokerage account is, how it works, and what you should consider when choosing the right broker for your needs.
In this guide, we’ll explore all the key aspects of brokerage accounts so you can start investing with confidence.
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 can you do with a brokerage account?
A brokerage account gives investors flexible options for growing wealth across different asset types. Here’s what you can do with a brokerage account:
Buy and sell assets: Invest in stocks, bonds, ETFs, and mutual funds available on US markets.
Choose investment style: Actively trade to take advantage of market trends, or choose a long-term, steady investment approach.
Access to advanced investments: Explore options, futures, and cryptocurrencies if your US brokerage offers them.
Reinvest dividends: Grow your portfolio automatically by reinvesting dividends from US companies.
Set up recurring investments: Schedule automatic contributions to stay consistent with your goals.
Track and manage portfolio: Use online tools to monitor performance, make adjustments, and plan for tax season.
Types of brokerage accounts and which is right for you
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, such as margin accounts or standard cash accounts. You may be 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 a 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 to help 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 charge a monthly fee 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 an all-in-one brokerage where you can build a multi-asset portfolio that includes everything from stocks and options to bonds, crypto, and a High-Yield Cash Account. As a member, you’ll gain access to a powerful suite of tools and data, including our Income Hub, which lets you track monthly earnings from all your interest and dividend-paying assets and forecast your income for the year ahead.
Public is the only investing platform with Alpha, an AI-powered investment research assistant that proactively provides context on the latest developments in your portfolio and the market at large. Have a question about an asset? Alpha lets you dive deeper into market trends and get instant answers on stocks and performance metrics through a natural language interface.
At Public, we’re serious about support and security. Our US-based, FINRA-licensed team is here when you need them, and your investments are protected with SIPC and FDIC coverage so you can confidently work toward your financial goals.
We designed Public for investors who take their financial futures seriously and seek a transparent platform focused on long-term growth. Join Public today and start building your multi-asset portfolio with the tools, data, and insights you need to make informed investment decisions.
Once you’ve chosen the right broker, the next step is understanding how to sign up for a brokerage account. Let’s take a simple look at how you can use it to start investing.
What do you need to open a brokerage account?
After an investor decides what brokerage firm and account best suits 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.
Risks and considerations
When investing, you may encounter certain risks, and it’s essential to understand them before getting started:
Market risk: The value of your investments may rise or fall depending on market conditions. While stocks can potentially have high returns, they also come with higher risks. You may experience fluctuations in your portfolio based on these conditions.
Fees: You may be charged various fees, such as transaction fees, account maintenance fees, or even hidden charges, depending on the broker you choose. These fees can accumulate, so you can review the fee structure carefully to ensure it aligns with your investment goals.
Regulatory protections: Most U.S. brokerage accounts are protected by the Securities Investor Protection Corporation (SIPC), which may safeguard your investments if your broker fails. However, SIPC does not protect against market losses, only broker failure.
By understanding these risks, you can be better prepared to make choices that align with your financial goals.
Now that you’re aware of the potential challenges, the next step is how to open your account through Public.
Opening a brokerage account with Public.com
Open to 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 stocks and options to bonds, crypto, and more. You can even earn an industry-leading interest rate with our High-Yield Cash Account.
It takes two minutes to join Public and start building your multi-asset investment portfolio. 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.
Choose the right brokerage account for your investment
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.
An investor’s choice between a hands-on or hands-off approach to investing can help determine whether an online brokerage account or a managed account would be a better fit. 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?
Three types of brokerage firms: full-service, discount, and direct access.
However, there are actually more than three types of brokerage accounts. Read our article for the main six.
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.
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.
What happens if my brokerage firm goes out of business?
Most U.S. brokerage accounts are protected by the SIPC, which helps recover your assets if your broker fails, though it doesn’t cover market losses.
