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What Is a Brokerage Account?


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Question: What is a Brokerage Account?

Answer: The first step to building your portfolio is to open a brokerage account. These accounts allow you to purchase stocks, bonds, mutual funds, and other investments by paying professionals to buy or sell the items you tell them to. The fee you pay them is called a "commission", and can range from as low as $5 to $10 dollars, to upwards of several hundred dollars. The price difference arises when you choose between either a discount or traditional broker. Traditional brokerages provide a wider range of services, and have the price tag to match. They serve along the lines of professional money managers and can offer advice as to what investments might be right for you. Discount brokers are companies that tailor to the more self-directed investor; they don't offer advice as to what to put your money into, leaving you to make your own financial decisions and charging you much less than their traditional counterparts. Some firms, such as Charles Schwab and Merrill Lynch, offer both services to their customers, allowing them to choose between the traditional and discount formats.

In opening a new account, the minimum investment can vary, usually ranging from $500-$1,000 (and even lower for IRA's and other retirement and education accounts). Most offer the option of either having an application form sent to you, or allowing you to fill them out online, print them, and mail them in with a check. The process is easy and can be done fairly quickly at almost all financial institutions.

Among the best discount brokers are E-Trade Financial, TD Ameritrade, and Scottrade. Each offers commissions of $8-$30 and have easy-to-navigate web sites. Almost all allow you to invest in mutual funds just as easily as in common stocks, which is a big plus for those who are just getting involved in managing their own finances. (Mutual funds are a collection of different stocks and bonds that are managed by professional money managers. For instance, if you wanted to invest in oil and / or gas and energy, but weren't sure which stocks in that industry to purchase, you could look for a mutual fund that dealt exclusively with those types of companies. You buy shares in the mutual fund, and the fund manager spends his time researching the different opportunities available.)

Once you have opened an account, you have the ability to start investing your money. All brokerages give you the option of setting up automatic monthly withdrawals, which will transfer an amount you specify each month from your savings or checking account to your brokerage account. This can be an easy way to start building up your equity; if you don't see it, you won't spend it. Since you won't notice the money that is missing each month, saving will be relatively painless.

More Information about Stock Brokers and Brokerage Firms

This is part of our beginner's guide to stock brokers and brokerage firms, which contains a wealth of resources for new investors.


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