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When you open a brokerage account with a brokerage firm, you transfer money into the account that you can use to start investing. While some brokerage accounts may set an account minimum, there is typically no limit to how much you can deposit or when you can withdraw your money from a taxable account.
With a brokerage account, investors can invest in a variety of securities, including stocks, bonds, ETFs, and more. While there are many brokerages to choose from, the steps to open a brokerage account for beginners are generally the same: pick a provider, complete an application, fund your account, and start investing.
Key Points
• Select a brokerage provider that aligns with your investment goals, considering services and fees.
• Complete the online account setup by submitting personal and financial information.
• Transfer money to the brokerage to fund the account, similar to a bank deposit.
• Start trading stocks, bonds, and ETFs once the account is funded.
• SIPC insurance protects up to $500,000 in securities (including up to $250,000 for cash) if a brokerage fails, which means your assets have a layer of protection in that scenario.
How to Open a Brokerage Account
There are a few simple steps to opening your first brokerage account. We’ll dive deep into each one below.
• Choose a brokerage provider.
• Sign up for an account.
• Transfer money.
• Start trading.
Step 1: Choose a Brokerage Provider
There are several types of brokerage accounts, and the type you choose will depend on what you’re trying to accomplish.
• Full-service brokerage firms allow clients to trade securities and may also offer financial consulting and other services, though the fees tend to be higher than the other options.
• Discount brokerage firms typically charge lower fees than full-service, but as a result clients typically don’t have access to additional financial consulting or planning services.
• Online brokerage firms are typically online-only, allowing clients to sign up, transfer money, and make trades through their website. These firms also tend to offer low fees, and in fact many discount brokerages have evolved to operate as online brokerage firms.
The accounts with these brokerages are typically cash accounts: You must buy securities with funds you put in your account ahead of time.
You may also encounter margin accounts, a more advanced account type that lets you borrow money from your brokerage to make investments, using your cash account as collateral.
These accounts tend to be for sophisticated investors willing to shoulder the risk that investments bought with borrowed funds may come with stepper losses if they lose value.
Before working with an individual investment advisor or a firm and opening a cash or margin account, it can be a good idea to run a check on their background. The Financial Industry Regulatory Authority (FINRA) offers online broker checks where you can enter a broker’s name, or the name of a firm, to learn whether a broker is registered to sell securities, offer investment advice, or both.
And you can learn about a broker’s employment history, regulatory actions, and whether there are past or current arbitrations and complaints.
Step 2: Sign Up for a Brokerage Account
Most brokers let you open and access a brokerage account entirely online, and the steps to open a brokerage account are generally straightforward for beginners: provide some personal details, fund the account, and start investing.
When you open the account, you will likely be asked to provide your Social Security number or taxpayer identification number, your address, date of birth, driver’s license or passport information, employment status, annual income and net worth. You may also be asked about your investment goals and risk tolerance.
For the most part, most brokers do not charge a fee to open an account. While some may require account minimums, others allow you to open an account with no minimum deposit. There is no industry limit on the number of brokerage accounts you can open, and you can hold accounts across multiple brokerage firms at the same time.
Step 3: Transfer Money
To open a brokerage account and start investing, beginners can fund it by linking a bank account and initiating an electronic transfer, mailing a check, or moving assets from an existing brokerage.
Step 4: Start Trading
Once your brokerage account is open, you can start trading by placing your first buy order through the platform’s trading interface. Many brokerage firms also let you earn interest on uninvested funds through a brokerage sweep program, so your money isn’t sitting idle between trades.
A brokerage sweep account moves uninvested funds in a brokerage account to interest-bearing accounts at affiliated banks, or sometimes to money market funds for the potential to earn yield. Importantly, when funds move to deposit bank accounts, the insurance coverage shifts from the Securities Investor Protection Corporation (SIPC) to the Federal Deposit Insurance Corporation (FDIC). When the money moves back to the brokerage account, the coverage transitions back to SIPC. More on this below.
How Do Brokerage Accounts Work?
The registered brokerage firm you use maintains your account and typically acts as the custodian for the assets you hold. In other words, the custodian helps to safeguard assets on your behalf and keeps records of what you own.
However, you own the investments in the account and can buy and sell them as you wish. The brokerage firm acts as a middleman between you and the markets, matching you with buyers and sellers, and executing trades based on your instructions.
For example, if you place an order with your brokerage to buy a certain number of shares of stock, the brokerage will match you with a seller looking to sell those shares and make the trade for you.
What’s the Difference Between Brokerage Accounts and Retirement Accounts?
When weighing a taxable vs. retirement account, it’s important to understand the tax implications. Brokerage accounts are also known as taxable accounts because profits on sales of securities are potentially subject to capital gains taxes.
Retirement accounts, on the other hand, offer a number of tax advantages that may make them preferable to taxable accounts if you’re planning to save for retirement. Retirement accounts place limits on how much money you can contribute and when you can withdraw funds.
If retirement planning is your main goal, consider maxing out a 401(k) (if your employer offers one) and a traditional or Roth IRA first. Once those accounts are funded, you may open a taxable brokerage account for any remaining investments — a straightforward step that beginners can often complete online in minutes.
Is My Money Safe in a Brokerage Account?
The money and securities held in a brokerage account are insured by the Securities Investor Protection Corporation (SIPC). When you open a brokerage account, SIPC coverage is one of the key safeguards in place — it protects against the loss of cash and securities held at failing brokerage firms. If your brokerage firm goes bankrupt, SIPC covers up to $500,000 in losses, including up to $250,000 in cash.
Relatedly, as mentioned earlier, if your brokerage participates in a cash sweep program that moves cash in a brokerage account to interest-bearing deposit accounts at affiliated banks, the insurance protection shifts from the SIPC to the FDIC. The FDIC offers deposit insurance up to $250,000 per depositor, per insured bank, for each account ownership category. When the cash moves back to the brokerage account, the protection will shift back to the SIPC.
The SIPC only provides protection for the custody function of a brokerage firm. In other words, they work to restore the cash and securities that were in a customer’s account when the brokerage started its liquidation proceedings. The organization does not protect against declines in value of the securities you hold, nor does it protect against receiving and acting upon bad investment advice.
Every investor should understand that investing comes with a certain amount of risk. While security prices may gain in value, it is also possible that you could lose some or all of your investment.
The Takeaway
Opening a brokerage account is a straightforward process that lets you invest in securities like stocks, bonds, and ETFs. Effectively, you’re depositing money at a brokerage, which will allow you to buy investments such as stocks, bonds, or ETFs. There are numerous brokerages out there, and different types of brokerage accounts.
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FAQ
How do I open a brokerage account?
To open a brokerage account, beginners typically follow a few key steps: choose a broker or brokerage platform, complete the sign-up process (which usually requires your personal information and a government-issued ID), fund the account by transferring money from a bank, and then start placing trades or building an investment portfolio.
What are the different types of brokers?
The main types of brokerages are full-service firms, discount firms, and online firms. Understanding the differences between them is one of the key steps when you open a brokerage account, since each type varies in the products, services, and level of support it provides.
Is money in a brokerage account safe?
The Securities Investor Protection Corporation, or SIPC, insures the securities and cash held in a brokerage account for up to $500,000 in the event that the brokerage fails. This includes up to $250,000 for cash associated with sale or purchase of securities. The SIPC does not cover cash held for the purpose of commodities trading nor does it protect customers from investment losses.
Article Sources
- SIPC. What SIPC Protects.
- FINRA. Investment Accounts: Brokerage Accounts.
- FINRA. BrokerCheck.
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