What is a brokerage account?

If you’re looking to have access to a broad array of investments, you’ll need a brokerage account. Unlike a bank account, a brokerage account serves as your gateway to stock exchanges, bond markets, and commodity markets.

Although a brokerage account isn’t necessary for financial success, it can make it easier to find and manage investments that are right for you.

A brokerage account is a financial account that allows individuals to buy, sell, and hold various types of financial assets, such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), and more. It serves as a platform that connects investors with the financial markets, enabling them to participate in trading and investment activities. 

Many of the largest mutual fund firms offer brokerage accounts, just as many of the largest discount brokerage firms offer mutual funds. The lines have gotten blurry over the years due to changes in regulation and customer needs.

Once the account is set up, you can deposit funds into it and use those funds to buy assets that align with your investment objectives. 

A brokerage account holds your investments and works as a platform for future trades you might make. Brokerage accounts are designed to make it easy to buy and sell securities. In addition to simple order entry capabilities, many brokers have services that make it easy to research and compare securities that you are interested in through company profiles, analyst reports, economic data, real-time price quotes, and charting services. Most brokers have mobile apps so that you can check on your account and research investments whenever you like.

The broker may charge you commissions for certain types of trades, and it may be a flat fee or a percentage of the trade. For example, many brokers allow free trades in mutual funds and exchange-traded funds but charge for options trades. 

Brokerage accounts differ based on the types of trading allowed in them. There are three primary types:

• Cash: A cash account is the standard brokerage account. Holders are allowed to deposit money and buy securities. They may not use margin (borrowing) or trade-in options. Cash accounts may have single or joint ownership. Some brokers allow account holders to have easy cash access through checks or debit cards.
• Margin: A margin account allows holders to borrow money or securities to buy securities using leverage or to sell securities short. In addition to the paperwork required to open a cash account, a prospective margin account holder will need to sign a margin agreement showing that the risks of margin trading have been explained to them. Keep in mind that you will be charged interest when you use margin.
• Options: An options account allows holders to buy and sell options and futures. Anyone interested in an options account will need to read and sign an options agreement, showing that they are aware of the risks. As options and futures have built-in leverage, an options account holder will also need a margin agreement on file. 

Brokerage firms are financial institutions regulated by the federal government and tied to the global financial markets. Under law, they must know who they are dealing with and where their money comes from. These are known as Know Your Customer (KYC) rules, and you will be asked to provide a lot of information in your account application. 

The broker will have an application form that most likely will take the form of an online portal. You will need to fill it out. It will ask for information about your name, your address, your Social Security number, your citizenship status, your employment status, your income, your net worth, your financial goals, and your risk tolerance. Many brokers use information from credit reporting bureaus to automatically verify the information that you provide. 

Your brokerage account will be linked to your bank account so that you can transfer money back and forth. You will also need to submit your Social Security card or fill out an IRS W9 form so that any taxable income will be reported properly. 

A brokerage account is a good idea for people who have their basic financial infrastructure in place. This includes a bank spending account, an emergency fund, and a retirement account. A brokerage account can help you explore other types of investments, manage long-term savings, and hold shares of stock or bonds you may have inherited or acquired through an employer. 

Some people opt for a brokerage account because they want to do short-term trading. Some brokers specialize in services for traders and may offer cryptocurrency and foreign-exchange trading in addition to the usual mix of stocks and bonds.

You don’t need a brokerage account, of course; workplace retirement accounts and mutual funds can help you meet your financial goals without a brokerage account. You can buy government bonds through TreasuryDirect as well as through a broker. Given that many mutual fund companies offer brokerage accounts, though, you may find that it does not take a lot of additional paperwork to add brokerage services to your current financial setup. 

A brokerage account is a versatile financial tool that allows investors to access and participate in the financial markets. It serves as a hub for buying, selling, and holding a wide range of financial assets, enabling individuals to pursue their investment goals and grow their wealth over time. Having one makes sense for people who have established a financial foundation and hope to build on it over time.

Editorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publish. Check the lender’s website for the most current information.

This article was originally published on SFGate.com and reviewed by Lauren Williamson, who serves as the Home and Financial Services Editor for the Hearst E-Commerce team. Email her at [email protected].