What is a Brokerage Account, and Do I Need One?

Estimated read time: 4 minutes

A brokerage account sounds like a fancy thing only rich people have and use, but most anyone can open a brokerage account. If you want to buy individual stocks on your own, you'll need to do so, but there's no need to be intimidated at the thought.

The Scoop on Brokerage Accounts

If you invest in an index fund, you're buying a "basket" of different stocks. You don't have to choose them, they're already chosen for you, but if you want to buy an individual one like Nike stock, or Apple or Amazon, you need to open a brokerage account.

A brokerage account is an investment account. You deposit money into it like you would a checking or savings account. The money held in that account is SIPC (Securities Investor Protection Corporation) insured, much like the money in your checking and savings account is FDIC (Federal Deposit Insurance Corporation) insured.

The SIPC protects stocks, bonds, and other securities in the event a brokerage firm was to go bankrupt. The SIPC covers up to $500,000 in securities, which includes up to $250,000 in cash held in a brokerage account.

This does not protect you from losing money on investments but protects you in the event the brokerage firm goes under.

You use the money in your account to buy investments like stocks, bonds, and mutual funds.

How Brokerage Accounts Work

There are two types of brokerage accounts: full service and online. If you want the help of a financial advisor when choosing investments and for other kinds of financial planning advice, you need a full-service brokerage firm.

Well, who wouldn't want professional advice when dealing with something as sensitive as personal finance? Good question. The answer is people who want to save money. A full-service brokerage firm doesn't give that kind of advice away for free, and the fees you'll be charged can add up quickly, eating into your portfolio.

The truth is, those expensive advisors often fail to beat the market. In addition, no one is going to care more about your money than you do, no matter how much you're paying them. By doing some basic research, you can successfully invest on your own and save yourself a ton of money in fees.

If that sounds good to you, you can use an online brokerage account. It provides the platform to buy and sell investments on your own, and many have robust research tools customers have free access to.

Which Brokerage Account is Best for You?

We believe anyone reading this is more than capable of investing on their own, and saving the money they would have to pay for a financial advisor so an online brokerage account is a good choice.

The things you should look for when choosing a brokerage account include low fees, low or no minimum deposit to open an account (although of course, you will have to have enough money in your account to buy the investments you want), and a robust set of investment research tools. This saves you from having to chase down the information you need to make good investing decisions across multiple sources.

Because there is so much competition between brokerage firms, shop around to see who is offering the best promotion. Some will offer things like X number of free trades when you deposit a qualifying amount of money into your account, and some have been known to offer straight up cash bonuses!

How to Open a Brokerage Account

Opening a brokerage account is easy. You'll generally fill out an application online which only takes a few minutes and mostly asks for identifying information like your Social Security and driver's license numbers.

What may take longer is actually being able to start buying investments. You have to make an opening deposit into your account, and it can take a few days for the funds to be transferred and verified. Once the funds are verified, you can start buying.

Considerations

Buying and selling through a brokerage account is easy, which is a good thing, but it's not without its dangers. Since all you have to do to buy or sell an investment is click a few buttons, it's easy to fall into the trap of frequent trades.

This is a mistake, especially for amateur investors. Do your research, make your investments, and hold them. Day trading sounds glamorous, but you will lose your shirt attempting it. Successful investing is the long-game. The market has ups and downs, but over a long time horizon, you can ride out those downs.

Along the same lines, don't check your investments constantly. It's so seductive to chart your investments on some of those brokerage account sites because they have all kinds of sexy charts and graphs. If you're numbers are up, it's really fun to monitor your investments, but when they're down, and when you invest long-term they will sometimes be down, it can lead you to make rash decisions.

It doesn't matter what your investments are doing over a day or a week or even a year. You're investing for a long time horizon. Which means you shouldn't invest money you will need in less than five years, rather it's for routine spending or a medium-term goal like buying a home.

Anyone Can Do It

There is a lot of money to be made by keeping average investors in the dark, making them think investing is just beyond anyone who doesn't have a degree from Wharton or an office on Wall Street.

Thanks to online brokerage accounts, investing has been democratized. You don't have to be rich and read the Wall Street Journal cover to cover every morning to invest your own money and to do so successfully. With the right online brokerage account, you can be up and trading in no time.