What Is a Brokerage Account?

At its most basic, a brokerage account is an investment account for holding money used to invest in taxed assets like stocks, bonds, and a variety of fund types. 

Brokerage accounts come in many financial varieties and flavors, so if you're not sure how a brokerage account works or which type of account is right for you, don't worry. It can be a little complicated.

What is a brokerage account?

A brokerage account is a vehicle that allows you to invest in non-tax-sheltered assets like stocks, bonds, mutual funds, or exchange-traded funds. Unlike retirement fund assets, which generally benefit from some type of tax advantage, brokerage assets are generally subject to short- and long-term capital gains taxes. On the plus side, these accounts can be accessed at any time, penalty-free.

With a brokerage account, you can:

• Buy or sell a variety of investment products, typically including stocks, bonds, mutual funds, or ETFs
• Educate yourself with your brokerage provider's investment research, education platform, or other available tools
• Invest outside of your self-directed or employer-led retirement account
• Gain access to the potential long-term growth associated with a longstanding investment in the securities market

Different types of brokerages

Once upon a time, there was only one type of brokerage account — the full-service brokerage — which reserved its services exclusively for the ultra-wealthy. About 50 years ago, discount brokerages arrived on the scene, offering never-before-seen investing opportunities to the mass affluent and middle class.

Later, as the internet rose to everyday prominence, some discount brokerages moved online, whereas new internet-only players entered the industry. Finally, over time, an array of robo-advisors and investing apps entered the market, giving would-be investors hand-held access to different types of assets and varying levels of financial advice.

With so many options available today, it's not always easy to decide which companies offer the best brokerage accounts to meet your individual needs. To make it easier, let's break it down.

In general, the differences between account types boil down to fee structure (how you pay for the service), access to financial advice, and the overall management structure of the brokerage account in question.

Full-service brokerages

Full-service brokerages generally offer comprehensive and customized financial support, often including wealth management advice, portfolio review, estate planning, and tax guidance. These firms — which include well-known names like Fidelity, Edward Jones, and Merrill Lynch — typically offer walk-in offices where clients can sit down and chat with their financial planner face-to-face.

These firms generally charge a fee of 1% to 2% of assets under management (so typically between $1,000 and $2,000 for every $100,000 managed), sometimes in addition to any commissions paid out by individual investments purchased on your behalf. Many full-service brokerages only open their doors to investors who have at least $100,000 to $250,000 in investable assets.

Robo-advisors

Robo-advisors like Stash and Acorns use computer algorithms and software modeling to step in and offer financial solutions traditionally provided by a live, in-person financial planner. In general, portfolio recommendations are determined by answers to an online questionnaire and investment options typically consist of low-cost ETFs and index-tracking mutual funds. Both investment types typically mirror the performance of particular, chosen slices of domestic or global economies (the largest 500 companies within the U.S., for example).

Account minimum requirements vary a bit with robo-advisors — from a few hundred dollars up to $5,000 or more, but these asset levels still make robo-platforms highly accessible to the everyday or cost-conscious investor. Annual management fees usually range between .25% to .40% of assets under management, but there are a few cheaper or even free options on the market.

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Discount and online brokerages

Discount and online brokerages don't generally offer investment advice or other related services but will carry out buy and sell orders, usually online, at a discounted — and increasingly often commission-free — price.

Because these platforms don't typically offer access to a live person, discount and online brokers are well-suited for the investor who knows what securities they want to buy or sell and is comfortable executing and timing trades on their own.

Many full-service brokerages also offer discount brokerage services — Merrill Edge, for example — but so do well-recognized online brokerage powerhouses like E-Trade and Ameritrade.

Which brokerage account should I choose?

Picking a brokerage account will come down to your personal financial goals and individual priorities. Do you have an idea of your short- and long-term goals or do you need guidance? Some investors are willing to pay more for a personalized advisory service. Others prefer a less expensive, do-it-yourself type platform.

Here are the factors to consider when choosing an account:

• Level of support: Are you looking for a financial planner who can create a fully customized, robust investment strategy, looking to place a few independent trades, or seeking a fully-automated, online platform that can set and rebalance a general investment strategy? Depending on the kind of investment decisions you need to make, you may want more or less support.
• Pricing and fees: The more support a platform offers, the pricier it's likely to be. A brokerage with low fees is likely to offer you less advice and support.
• Required account minimum: Novice investors don't often have a large pool of assets to start investing with, which may make robo-advisor platforms the perfect balance between a full-service brokerage and a bare-bones discount brokerage service.
• Your investment style: Active traders may be attracted to the low (or no) commission structure offered by discount brokerage accounts. If you're looking to enact a long-term strategy, meanwhile, you may be better served by a full-service or robo-advisor firm.

Margin account vs. cash account

Within a brokerage account, there are two account types: cash and margin. The cash account is the more straight-forward of the two. As a cash investor, you pay the full amount for the securities you buy.

With a margin account, you can use the value of the already-existing securities in your account to borrow money from your brokerage firm to buy even more securities. This is called buying on margin, which increases your buying potential but also increases investment risk, sometimes substantially.

Investing on margin can be a high-stakes game, which is why it's a strategy that is typically only selected by investors with the highest risk tolerance.

How to open a brokerage account

Opening an online brokerage account is quick and easy, often taking as few as 15 minutes. Just head over to your preferred firm's brokerage website and complete the available application. If you'd rather work with an in-person advisor, call your local office to make an appointment to set up your account in person.

Either way, here are some easy tips to help you open a brokerage account

• Plan to make a deposit or transfer funds into your new account. Check to make sure you meet the required account minimum.
• Choose a cash or margin account.
• Once your transferred funds hit your account, you're ready to start trading.

Want more than one brokerage account, so you can try a few and see which works best for you? No problem. There is no limit to the number of brokerage accounts you can hold.

Easy-to-open brokerage accounts

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What's the difference between a brokerage and retirement account?

A brokerage account — sometimes called a taxable account or standard brokerage account — generally describes a non-retirement investment account and can house any number of investment securities like stocks, bonds, mutual funds, and ETFs.

Investments within a brokerage account are generally subject to short- and long-term capital gains tax (as your balance grows, you pay tax on those earnings) but they're flexible. There are no investment limits and you can put money in or take it out whenever you want.

A retirement account, on the other hand, has more advantages but is subject to more rules. There are different categories of retirement account, so check out our guide to 401(k)s and our comparison of Roth and traditional IRAs to learn more.

Bottom line

An investment account can be one of the most effective, efficient ways to grow wealth over time and could be a way for you to explore the stock market. No matter which type of brokerage account you choose, investing involves risk, including the potential to lose your original capital.

If you're not ready to face the markets alone—and let's face it, few investors are—consider a professional money manager, who can help pave your path. That's true whether you turn to an in-person investment advisor with a customized long-term strategy or an online robo-advisor with an off-the-shelf portfolio plan that meets your investment profile.

What's most important is that you find the right level of advice, the correct brokerage platform, and the account that ultimately works best for you and your investment objectives.

Check out our lists of the best brokerage accounts or the best robo-advisors for some options.

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