What Is a Brokerage Account? Definition, How to Choose, and Types

A brokerage account is an investment account held at a licensed brokerage firm. An investor deposits funds into their brokerage account, and the broker executes orders for investments such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs) on behalf of the investor.

The assets in investment accounts belong to the investors, who normally must report any income or loss derived from the account on their taxes.

Understanding Brokerage Accounts

There are several types of brokerage accounts and brokerage firms, allowing investors to choose the model that best suits their financial needs.

Some full-service brokers provide extensive investment advice and other wealth management services, but charge high fees and come with large account minimums. On the other end of the spectrum, most online brokers provide a simple and secure interface for investors to place trades for no commission. Robo-advisors are another category of financial services provider. These digital platforms offer financial planning and investment services driven by algorithms, not people. Typically, they are low-cost and have low account minimums.

Brokerage accounts may differ in order execution speed, the scope of tradable assets, the depth of analytical tools, and the extent to which investors can trade on margin.

For any type of brokerage, the most basic account is a cash account. This allows you to buy investments using the money deposited in the account. However, you can't sell short, buy on margin, trade options, or take advantage of other more sophisticated products, as those require a margin account.

A margin account allows you to borrow additional funds from your broker. The securities in your account serve as collateral. Brokerages charge maintenance interest on these loans, and you may be required to immediately deposit additional funds if the securities in the account lose too much value—this is what is known as a margin call. If you can't meet a margin call, your broker may close some or all of your positions to meet the margin requirement.

Types of Brokerage Accounts

Full-Service Brokerage Accounts

Investors seeking the expertise of a financial advisor can consider full-service brokerage firms such as Merrill, Morgan Stanley, Wells Fargo Advisors, and UBS, among others. Financial advisors are paid to help their clients develop investment plans, execute trades, monitor investments and market trends, and more. Financial advisors may work on a nondiscretionary basis, where clients must approve transactions, or on a discretionary basis, where transactions don't require prior client approval.

Full-service brokerage accounts charge either commissions on trades or advisor fees. A commission account charges a flat fee anytime an investment is bought or sold, whether the recommendation came from the client or the advisor, and whether the trade is profitable.

By contrast, an advisor fee account involves flat annual fees ranging from 0.5% to 2% of the total account balance. In exchange for this fee, no commissions are charged when investments are bought or sold. Such accounts generally come with higher account minimums. Investors should discuss compensation models with financial advisors at the onset of relationships.

Discount Brokerage Accounts

Investors who favor a do-it-yourself investment approach might consider a discount brokerage firm. These firms charge significantly lower fees than their full-service counterparts but also offer fewer services. Discount brokerage firms, such as Schwab (SCHW), Fidelity (FIS), and E*Trade (ETFC), are best suited for cost-conscious investors who prefer to make their own trading and investing decisions.

For example, an investor who decides on a typical discount broker can open a regular taxable brokerage account (or a retirement account) with a minimum deposit as low as $0. Nowadays, most brokers charge no commission to buy or sell most stocks, options, or ETFs. Some discount brokers may charge fees for non-U.S. or thinly traded stocks, but this varies from broker to broker. Generally, they also charge for trading more complex instruments, such as futures, or more exotic assets, such as cryptocurrencies.

The purchase of Treasury bonds is typically commission-free, although charges may apply for bonds traded in the secondary market. Many brokers, including Schwab, Fidelity, and E*TRADE, also offer a wide variety of no-fee mutual funds.

Robo-Advisor Accounts

Robo-advisors are platforms where automated algorithms make investment decisions on behalf of clients without human participation. Those investments are usually restricted to pre-defined strategies and limited to specific instruments, such as mutual funds or ETFs. Robo-advisors generally charge a flat monthly or annual fee or an annual commission of around 0.25% to 0.50% of assets under management.

The minimum required to open an account can range from $0 to $500 to over $5,000. Robo-advisors offer a viable alternative for people new to investing and experienced investors who prefer a hands-off approach to portfolio management.

Brokerage Accounts With a Regional Financial Advisor

Those investors who prefer a personal relationship and a choice of services may also want to work with a brokerage firm that's part of their community. They could consider a regional firm that falls between full-service and discount brokerage firms on the cost scale. Such companies include Raymond James Financial Inc. (RJF), Janney Montgomery Scott, and Edward Jones.

These brokerages act as both broker-dealers and financial advisors. They can require a sizable minimum deposit and cater to individuals with slightly higher net worth. Over time, though, their services tend to be less expensive than those of larger brokerages.

Online Brokerage Accounts

Online brokerages are a good choice for investors who prefer to select their own investments and execute their own trades via a website or mobile app. Many also offer more in-depth research and analysis tools to help clients make informed decisions.

Robinhood Markets Inc. (HOOD) pioneered no-fee stock, ETF, and options trading back in 2013, and most online brokers have since followed suit. Robinhood generates revenues from payment for order flow (PFOF), margin interest, income from cash holdings, and more. PFOF is the compensation a brokerage receives for directing trades to a specific market maker. The amount paid is usually a fraction of a penny per share.

As of 2024, both well-established and new brokers offer zero-commission stock, ETFs, and options trading, including Charles Schwab, Fidelity, E*Trade, Vanguard, and Interactive Brokers (IBKR).

Cash Brokerage Accounts

A cash brokerage account requires you to deposit cash to start trading. This account limits your options to the basics, such as buying or selling stock. For example, short-selling a stock is not possible within cash accounts. Cash accounts can be either discount or full-service accounts.

Margin Accounts

A margin account allows you to borrow additional funds from your broker. The broker acts as a lender, and the borrowed funds allow for larger and more advanced trades, such as short-selling. The investor pays interest on the money they borrow. The brokerage may demand an immediate deposit of additional funds from an investor to avoid a margin call, a situation where the value of an account drops below a specific margin requirement level.

Margin accounts are also offered by discount and full-service brokers. While a margin account offers you more flexibility, it also brings additional risks. If you are new to investing, it’s advisable to be extra careful when using leverage.

Are Brokerage Accounts Safe?

Yes, brokerage accounts are generally a safe place to keep your money. However, that doesn't mean that they're without risk.

The Securities Investor Protection Corporation (SIPC) is a nonprofit organization that provides coverage to investors in case their brokerage firm faces financial difficulties or goes bankrupt. The SIPC safeguards customers' assets, including cash and securities like stocks and bonds, held within a brokerage account at an SIPC-member firm.

The protection offered by SIPC is limited to $500,000 per customer per brokerage firm. This coverage includes up to $250,000 protection for cash in the account. It's important to note that SIPC protection does not cover investment losses because of market fluctuations or poor investment decisions. Instead, it focuses on protecting customers' assets in the event of a brokerage firm failure or misconduct. Most brokerage firms in the U.S. are members of SIPC, providing their customers with this added layer of protection.

Even with the SIPC protection, beware of the risks and only invest money you can afford to lose.

How to Choose a Brokerage Account

When opening a brokerage account, don't settle for the first one you find. It's essential to ensure you choose the right one. The first step to choosing the right brokerage account is to consider your needs.

Are you an active or passive investor? Are you looking to focus exclusively on mutual funds, ETFs, stocks, bonds, other securities, or a combination of all the above? Do you plan on making mostly basic market orders, or do you want more advanced order types?

Brokers cater to different types of investors. One might offer features that appeal to buy-and-hold investors who mostly want to buy mutual funds and ETFs. Others will have advanced tools that are valuable to frequent traders and people who are interested in more complex instruments like options and futures.

Once you understand what your needs are, you can compare different brokers to see what they offer and how those services align with what you're looking for.

How to Open a Brokerage Account

To open an account, you must first choose a brokerage that suits your needs. If you’re still unsure, step back and consider, for instance, whether you’re an engaged investor who follows the markets daily, or someone who wants to leave that to others. Do you take a conservative (income-focused) or aggressive (growth-focused) approach to investing? Are you investing for short-term goals or planning for retirement? How easy is it to use a particular broker’s website?

Finding answers to these questions can help you choose the right broker and decide whether to open a taxable brokerage account or a tax-advantaged retirement account. Once you’ve selected a firm and the type of account you want to open (taxable or tax-advantaged), get the following personal information ready:

• Your Social Security number (or tax identification number)
• Your driver’s license, passport, or other government-issued ID
• Employment information
• Financial data (e.g., annual income, net worth)

The setup process will include questions about your financial needs, investment goals, investing style, and risk tolerance. You’ll need to fund your account once you’ve completed your profile. At that point, you can start trading.

Standard Brokerage Account vs. IRA Brokerage Account

Investors can open a standard brokerage account and an individual retirement account (IRA). In fact, you can open an IRA even if you already have a workplace retirement plan, such as a 401(k). It's a good idea because it gives you an additional tax-advantaged opportunity to save for retirement.

Knowing the difference between a standard brokerage account and an IRA can help you decide whether you should open one or the other—or both.

Frequently Asked Questions (FAQs)

The Bottom Line

A brokerage account is an investment account that investors open at a brokerage firm and use to buy and sell investment securities. These accounts can be a key to wealth-building. Brokerage accounts can be used to purchase, hold, and sell stocks, bonds, mutual funds, ETFs, and more. They can also be used for active stock trading, or for executing complex derivatives strategies. Investors can open a standard brokerage account and an IRA brokerage account, in addition to having a retirement plan at work, to maximize their saving and investing opportunities.