When you want to invest in the stock market, a brokerage account gives you access to multiple types of investments you can choose from to create the portfolio you want. With several types of brokerage accounts available, you can narrow down the options based on how you want to manage your investments, what type of risk tolerance you prefer, and what you’re saving for over an estimated period of time.
If you’re new to investing or simply want a refresher on your account options, learn more about different types of brokerage accounts, what you can use them for, and how to pick the best one out there.
How It Works
A brokerage account is a taxable investment account you open through a brokerage firm. You make cash deposits that allow you to purchase investments, either by writing a check or transferring money from another bank account. Depending on the type of account you choose, you’ll pay the brokerage firm a fee, either annually or for each trade you make. Your brokerage actually executes the transactions on your behalf after you choose your investments.
Today it’s quick and easy to open a brokerage account online. Once you do, you can then access your account details, including your current portfolio investments, to gauge performance and make decisions on future investment opportunities. If you ever want to switch brokerage accounts, you can initiate an online transfer of your funds. Just know that some firms charge an account closing fee or transfer fee that usually ranges between $50 and $75.
Types of Investments
One of the benefits of a brokerage account is that you can pick and choose from a variety of investment options. Standard investments available at most brokerages include the following. These four categories include some of the most commonly offered investments in brokerage accounts. However, depending on the firm you choose, you may have access to other opportunities as well.
You can typically select both common and preferred stocks, which means you can choose between receiving partial ownership of a company or earning ongoing dividends — or you can pick a combination of both.
Real estate investment trusts let you invest in real estate without the headache of being a landlord. They also help you diversify by spreading your investment over multiple incoming-producing projects across different sectors and geographic locations.
Diversify your portfolio with a lower risk option like bonds. You can purchase these from the U.S. Treasury, municipal agencies, or from corporations, all through your brokerage account.
Mutual Funds and ETFs
Mutual funds and ETFs are index funds that allow you to buy into a diversified portfolio alongside other investors. The difference between the two hinges on how they’re traded. Mutual funds trade once at the end of the day, while ETFs are traded continuously just like traditional stocks.
Less Common Investment Options
If you’re interested in more complex investments, make sure you shop around for a brokerage account that actually lets you add them to your portfolio.
Forex trading lets you invest in global currencies. Daily trading volume is high, and you’ll need an account with a specific forex broker in order to participate.
This high-risk investment type lets you invest in things like commodities and currencies by trading futures contracts. It’s a volatile market and most brokerages offer paper trading simulators so you can get the hang of your investment strategy without risking real money at first.
Online Brokerage Account vs Managed Brokerage Account
In addition to thinking about the types of investments you want to make, you also need to think about how you want to manage your brokerage account. There are two distinct types of accounts: online and managed brokerage accounts. You can also find hybridized versions of the two. Here’s how each main type of brokerage account works.
Online Brokerage Accounts
An online brokerage account lets you manually buy and sell your own investments through a digital platform. You typically pay a fee when you make a trade, which is determined by the type of investment being sold. If you’re not quite ready for self-directed investing, you can also opt for a robo-advisor. All you have to do is create an investment profile and your strategy will be automated and managed based on your goals and risk tolerance.
Managed Brokerage Accounts
If you want a little more hand-holding during the investment process or simply don’t want the responsibility of researching your options, you may prefer a managed brokerage account. This option allows you to have a real-life financial advisor at your disposal who executes investment decisions on your behalf. Instead of paying per trade, you pay an annual fee that is calculated as a percentage of your total invested assets.
Brokerage Account Limitations
Whether you open a self-directed brokerage account or a managed one, there are no limits to how much you can deposit each year. You can also choose to open as many accounts as you’d like. In fact, this strategy lets you take advantage of both types of investing or compare the results of your own selected investments with a managing broker’s results.
One thing to note, however, is that you’ll likely have to pay taxes on any dividends or capital gains you earn in your brokerage account each year. You should receive IRS form 1099-INT from your brokerage firm, disclosing the full amount of your investment income for the tax year so you know exactly what to report.
Retirement Brokerage Accounts
While regular brokerage accounts can be used at any time, you can also open a retirement brokerage account to help augment your retirement savings. While there are limits on the age you can start to withdraw funds without taking a penalty, you do receive some advantageous tax benefits.
The first option is a traditional IRA. You can make tax-free contributions to this account, meaning you don’t pay income tax the year you deposit funds. Once you reach the age of 59 ½ you can start making withdrawals from the account without the 10% penalty. At that point, you’ll have to pay taxes on whatever you take out, including earnings that have accrued from your investments over the years.
The second type of retirement brokerage account you can choose is a Roth IRA. The tax benefits are the opposite of what you get with a traditional IRA. While you do have to pay income tax on the money you contribute during the current tax year, you do not pay any taxes when you start making withdrawals. If your investments have grown substantially over time, you can save a lot of money this way.
There are, however, some limitations that come with both types of IRA accounts.
Not everyone qualifies to invest in either type of IRA and even if you do, you’ll face some restrictions on how much you can contribute. First, you need to meet the income requirements in order to make the full allowable contribution each year. The limit varies depending on whether you file single or jointly, whether you have a workplace plan, and whether your spouse is also covered.
Assuming you meet the income requirements, you can contribute up to $6,000 a year. If you’re 50 years or older, you can invest an additional $1,000 a year in either tax-advantaged account. A final limitation of IRAs is that you’re required to make withdrawals in the year you reach the age of 70 ½.
Picking the Best Brokerage Account
Choosing a brokerage account is a personal decision. Narrow down your choices by figuring out how you want to invest, either passively with a managed account or actively through an online trading platform. As you explore your options, compare the fee structure of each brokerage firm, including trade fees for specific types of investments you’d like to select for your portfolio.
It’s also important to review account minimums to make sure your available funds meet the threshold. Brokerage fees may also vary depending on how much you invest in the account, so pay attention to any tiered pricing that could impact your overall returns.
Finally, take a look at what extras a brokerage account offers you. Check out customer service reviews and also see if you get access to any educational resources. This is especially helpful if you plan on being a hands-on investor. If you’re opening a managed brokerage account, find out how often you can access a financial advisor and what means of communication you can use.
The Bottom Line
Opening a brokerage account is an important first step in establishing long-term wealth. Because any type of investment comes with some degree of risk, start off strong by choosing the right brokerage account that suits your needs and your comfort level. There are a wide range of options available that can help you reach your financial goals no matter what’s on the horizon, from a major life event in the near future to financial freedom in your retirement years.