What Is A Brokerage Account?

A brokerage account is an account set up with a licensed brokerage firm that allows you to buy and sell stocks, bonds, mutual funds and other investments.

Your broker oversees your account and is in charge of making transactions for you. Brokers charge a commission for each transaction made. However, these and other fees vary greatly depending on the brokerage firm as well as the type of account you choose.

There are basically two types of brokers to choose from. Each has its own advantages and disadvantages.

Full-Service Brokers

    Full-service or traditional brokers offer a wide variety of services including retirement planning, tax strategies, and experienced investment research.

    They will walk you through the process and help you build a customized portfolio designed to meet your objectives. They can be an excellent choice if you’re a beginning investor or lack the time and inclination to research your investments.

    But they come at a price and you will definitely pay for all the convenience they offer. Depending on the amount of transactions you perform, the commissions can really add up.

    However if you’re inexperienced, full-service brokers can be well worth the price, saving you from making costly mistakes such as selling when the market is low or buying too high.

    Before choosing this option, you need to evaluate your needs and objectives to decide if the cost is worth the reward.

Discount Brokers

    Unlike full-service brokers, discount brokers are essentially hands-off. Their fees are exponentially lower because you simply pay to have your trades executed on a secure interface.

    These are ideal if you’re a more experienced investor who has acquired the ability to understand financial statements and business and are able to perform the appropriate investment research.

    You’ll find lots of choices when it comes to discount brokers. However, three of the best are E-Trade Financial, Ameritrade, and Scottrade.

    Be aware however that you’re pretty much on your own with discount brokers. They offer no advice or research assistance. So if that seems overwhelming or just plain scary, they may not be the right choice for you.

Some companies such as Charles Schwab, Merrill Lynch, and Wells Fargo Securities offer both traditional and discount brokerage accounts. They also have excellent reputations which is extremely important when it comes to your money.

It’s imperative to research different brokerage companies before deciding on one. Their costs and features vary greatly. You’ll likely find that you prefer the benefits and options of one rather than another. If you’ll be trading often the feel of the website can be equally as important.

Although a brokerage account makes sense for trading, it’s not necessarily the only way to invest.

A direct stock purchase plan or dividend reinvestment plan is an alternative to the traditional brokerage account. These plans allow you to purchase shares directly from a company. And they’re dirt cheap by comparison.

They’re ideal if you don’t have a lot of capital to invest or are interested in buying and holding for the long term (10 years or more). You can have as many of these plans as you want and can invest in large, well established companies or smaller companies. They’re a simple, inexpensive way to build equity in the companies you choose.

These plans aren’t usually publicized since the brokerage companies make nothing when you approach investing this way. You’ll have to look a little harder to find direct stock purchase plan opportunities but it can be worth it. They can be a great low-cost way to invest if buy-and-hold is your strategy.

If you decide that trading is more your thing and want to set up a brokerage account, you have three kinds to choose from.

  • Cash Management Accounts – With a cash management account you simply ensure there is enough money in the account to cover each transaction including commissions and fees. It’s a pay as you go type and is the simplest of all the brokerage accounts.
  • Margin Accounts – A margin account allows you to buy securities with money borrowed from the broker. The Federal Reserve limits the percentage of money you can borrow for each transaction. And some brokerages have even stricter limits depending on the volatility of the investment.

    They tend to charge low interest rates on margin loans in an attempt to encourage investors to buy on margin.

  • Discretionary Accounts – A discretionary account is one in which the broker is permitted to buy and sell shares for you without first contacting you for approval. There’s a certain degree of trust required for this type of account.

    However, if you clearly outline your objectives and trust your broker, this account would allow them to react much more quickly and in some cases make or save you a lot of money.

Once you begin trading you will receive trade confirmations through mail or email after every transaction. It’s extremely important to check this document for accuracy and then keep it for your records.

Some things to look for are:

  • The name of the investment along with its ticker symbol
  • The cost of the share
  • The amount of shares bought or sold
  • The execution date of the transaction as well as the settlement date
  • The total value of the transaction including the brokerage commission
  • The account number in which the trade was placed

If you find a discrepancy, you need to address it immediately to increase your chance of a timely resolution.

There is a minimum investment required to open any new account, and they vary depending on the type of investments you choose. For example IRAs, retirement, and education accounts tend to require a lower minimum investment than other types.

You will also be required to claim as income any capital gains you incur from the account. Some accounts such as retirement or education accounts may defer or be exempt from some of these taxes.

And even though the account is managed by your broker, you own the assets contained in the account. It’s your money to do with as you please. However, early withdrawal of retirement and some educational accounts carry a heavy penalty.

Your best bet for easy investing is to take advantage of automatic withdrawal. All brokerages provide you with the option of having funds automatically withdrawn from your savings or checking account.

Once you set this up you can specify the amount to be transferred to your brokerage account each month and investing then becomes automatic.

This is by no means mandatory but it’s certainly the simplest way to do it. Set up your budget to include this amount just like any other expense and you’ll be amazed at how quickly your money can grow.

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