If you’re looking to get started investing, you may be wondering what a brokerage account is, and whether or not you need to set one up. A brokerage account is a type of investment account typically opened with a brokerage firm.
Keep in mind that there are a few different types of brokerage firms. While all offer brokerage accounts, they usually come with different fees and services. A full-service brokerage firm usually provides a variety of financial services, including allowing you to trade securities. Full-service firms will also sometimes provide financial advice and automated investing to their customers.s
A discount brokerage firm doesn’t usually provide any additional financial consulting or planning services. Thanks to their pared down services, a discount brokerage firm often offers lower fees than a full-service firm.
Online brokerage firms provide brokerage accounts via the internet. While some online brokerage firms also have brick and mortar locations, others are online only. Within online brokerage firms there are full-service firms and discount or self-service firms. Online brokerage accounts often offer the lowest fees and give you freedom to buy and sell securities online with ease. They also tend to make information and research available to their consumers.
How Does a Brokerage Account Work?
Most brokerage firms, regardless of the type, require investors to use cash to open their accounts and to have enough funding in their account to cover the cost of purchasing stocks or bonds as well as any commission fees. There are however, certain companies, like SoFi, that don’t charge any fees for trading stocks.
Should I Set Up a Brokerage Account?
Before you consider opening a brokerage account, make sure you have sufficient money set aside for an emergency fund. Common financial advice recommends setting aside three to 12 times your streamlined monthly expenses. It’s also good practice contribute to your 401k or IRA before opening a brokerage account.
If you have an emergency fund stashed away and are making regular contributions to a retirement account, think about what types of assets you plan on investing in. A brokerage account would only be required if you plan to buy stocks, bonds, or other securities. If you only plan on investing in mutual funds, you might not need a brokerage account.
What Type of Brokerage Firm Should I Use?
Deciding whether to use a full-service, discount, or online brokerage firm depends on how much and how often you plan to trade, and whether you want someone to manage your money for you.
If you plan to be more hands-on and do your own research, a discount firm might be the best option for you. If you plan on trading frequently, then you probably want to use an online firm that allows you make trades online or on a smartphone app with little or no fees.
Consider whether you would want access to research (typically provided by a discount firm), or if you plan to make foreign trades (not available from every brokerage firm), or whether you want the ability to make trades 24/7 (online might be your best bet).
If you make frequent trades, remember commission fees can add up over time. This calculator from the U.S. Security and Exchange Commission will help you estimate the cost of commission fees.
Once you have decided on the type of brokerage firm you’d like to open an account with it is worth doing some research on the different firms and they services they offer. The Financial Industry Regulatory Authority (FINRA) is a self-regulating organization that maintains a database with information on brokerage firms and brokers. Before you commit to a brokerage firm, take the opportunity to review the FINRA’s BrokerCheck service. Doing the research now could help you avoid issues in the future.
How Do I Open a Brokerage Account?
Most firms allow you to set up a new account online. You’ll need to provide basic information including your Social Security number and perhaps your driver’s license. Most firms will ask about your net worth, your employment status, what assets you currently own, and what you have defined as your investment goals.
Additionally, most brokerage firms offer two types of brokerage accounts—a cash account or margin account. A cash account is a type of brokerage account in which the investor must pay for the securities in full. In a cash account, you are not allowed to borrow money from your broker.
A margin account is a brokerage account that allows your brokerage firm to lend you money to buy securities. The securities already in your portfolio serve as collateral for the loan. And, as with any other loan, you will accrue interest when you buy securities on margin.
Another type of brokerage account is a discretionary account. This type of brokerage account, sometimes referred to as a managed account, allows an authorized broker to make trades on behalf of the client. The client usually must sign a discretionary disclosure with the broker. Many brokerage firms require account minimums for this type of account.
How Much Money Do I Need to Open a Brokerage Account?
Depending on the type of brokerage account you are opening, most firms let you open an account with about $1,000 but some require an initial investment of $2,500 or more. You will need to have enough money in your account to pay for one or more shares of the stock you want to buy plus the commission fee (if applicable). Each account and brokerage firm is different, so check with your preferred company to determine what the account minimums are.
How Do I Fund My Brokerage Account?
There are at least five ways to transfer money from your bank account into your brokerage account: electronic funds transfer, wire transfer, deposit a check, transfer an existing investment from another broker, or deposit an existing paper stock certificate.
Do I Need to Pay Taxes on My Brokerage Account?
The short answer is yes. Any interest or dividends earned from your brokerage account will be taxable. If you sell an investment and earn a profit, you will have to pay a capital gains tax. However, if you sell a stock at a loss, that becomes a capital loss and you could get a tax break from that sale which could lower your taxable income.
Investing with SoFi Invest®
If you’re interested in investing but are looking for a low-maintenance alternative to a brokerage account, consider investing with SoFi Invest. You can start investing with as little as $100 and there are no management fees in your first year.
After that, pay only 0.25% on balances over $10,000. When you invest with SoFi, you’ll gain access to our team of financial advisors who are available to offer you personalized advice to help you meet your financial goals. We’ll work with you to determine your risk tolerance and balance your portfolio as needed.
SoFi can’t guarantee future financial performance.
This information isn’t financial advice. Investment decisions should be based on specific financial needs, goals and risk appetite.
SoFi doesn’t provide tax or legal advice. Individual circumstances are unique. Consult with a qualified tax advisor or attorney.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Advisory services offered through SoFi Wealth, LLC, a registered investment advisor.