If you want to start investing, but you're not sure where to begin, chances are you've spent some time Googling "how to set up a brokerage account."
So, what is a brokerage account anyway? And what's involved in opening one?
A brokerage account gives you access to the stock market, allowing you to buy and sell stocks, bonds, ETFs and mutual funds in an effort to build your wealth (while taking on risk).
Brokerage accounts are offered by the big financial firms like Charles Schwab and Fidelity, and also by online brokers like Ally Invest. Brokers essentially act as middlemen between you and your investments. They hold the money you use to purchase investments and can execute trades on your behalf. Many brokers also offer users full-service investment planning, from personalized advice to market intelligence.
Unlike a retirement account, like your 401(k) or IRA, you can access the money you invest in a brokerage account at anytime — you don't have to wait until you reach 65. But new investors should be aware that you may pay taxes on your earnings. When you sell a stock and want to withdraw your earnings, you can do so at any time, but come tax season you'll need to pay a taxes on the income or dividends you make. This is why brokerage accounts are often called "taxable accounts."
Here are the basics that everyone needs to know when opening your first brokerage account.
What to expect when opening a brokerage account
You don't need much time or money to open and fund a brokerage account. Opening a new account online can take around 15 minutes. Typically, you'll fill out an online form providing information on your employment, net worth, investable assets, investment goals, as well as your basic information like your driver's license and Social Security number.
To fund your account, you'll need to transfer money from a linked bank account, such as your checking or savings. You may also be able to wire transfer money, deposit a check or transfer investments from another broker.
The broker may ask if you want a cash account or margin account. A margin account acts almost like a loan where the broker lends you money to make trades, and you pay interest, while a cash account means you fund your account with your own money.
Investors can have as many brokerage accounts as they want, and there is no limit to how much money you can deposit into your taxable brokerage account each year.
What to look out for when opening a brokerage account
Pay attention to the fees when opening a brokerage account. Brokers get compensated through commissions, although many now offer commission-free trading for trading stocks. Brokers offering free stock trading include TD Ameritrade, E*TRADE and Vanguard. But often times you'll be charged for other things like management and advisory fees. Make sure to also note any costs associated with trading outside of stocks, such as mutual funds, ETFs, bonds and options.
Most brokers don't have minimum deposit requirements for opening an account. You may, however, have to reach a minimum to make investments, such as purchasing a minimum dollar amount of shares to invest in an index fund.
What if you don't know much about investing?
If you're overwhelmed by the idea of investing, consider a robo-advisor platform instead. Investing on your own through a brokerage firm requires you to know at least the basics of how to choose the right stocks, bonds or funds. With a robo-advisor, you can get a well-diversified portfolio thanks to algorithms that consider the best investments based on your financial goals.
SoFi Invest®, for example, offers automating investing, and you don't need to reach a minimum deposit or maintain a certain balance. SoFi also stands out for allowing you to also participate in company IPOs at no minimum cost.
If you like the idea of a robo-advisor but would feel more comfortable knowing there's a real-life financial advisor you can talk to when you need to, considerBetterment. Enrolling in Betterment's premium plan gets you unlimited access to a financial advisor. If you aren't a premium member, one-time advisor consultation fees range from $199 to $299.
Bottom line
Setting up your first brokerage account is an exciting step in your investing journey. You can really start to build your wealth by putting your money in the market where it grows in part thanks to compound interest.
But before you dive into investing, you'll want to consider your overall financial picture. Make sure your debt is under control (especially high-interest credit card debt), you're investing in a retirement account (and meeting any employer 401(k) match), you have an emergency savings account and — this is crucial — you understand the risks and still feel comfortable investing.
Read more
This 3-question checklist will help you determine when you’re ready to invest your money
Socially responsible investing can help you make a positive impact: Here’s what you need to know
Here are the 7 biggest investing mistakes you want to avoid, according to financial experts
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
FAQs
You might be asked if you want a cash account or a margin account. A margin account allows you to borrow money from the broker in order to make trades, but you'll pay interest and it's risky. Generally, it's best to stick with a cash account at first.
What should my first brokerage account be? ›
You might be asked if you want a cash account or a margin account. A margin account allows you to borrow money from the broker in order to make trades, but you'll pay interest and it's risky. Generally, it's best to stick with a cash account at first.
How much money do I need to start a brokerage account? ›
Many brokerages don't have minimum starting deposits or ongoing balance requirements. That means you could open a brokerage account and start investing with whatever funds you have—whether that's $100 or $1,000.
What to expect when opening a brokerage account? ›
Opening a new account online can take around 15 minutes. Typically, you'll fill out an online form providing information on your employment, net worth, investable assets, investment goals, as well as your basic information like your driver's license and Social Security number.
What information will you likely need to open a brokerage account? ›
Firms will ask for your age, employment status, other investments, financial situation and needs, tax status, investment experience and objectives, investment time horizon, liquidity needs and tolerance for risk.
Do you pay taxes on brokerage accounts? ›
Taxable brokerage accounts. An ordinary brokerage account that is not a retirement account is a taxable investment account. If you make money because your investments go up in value, or because your investments pay you dividends or interest, this income will be taxed.
Is putting money in a brokerage account a good idea? ›
A brokerage account is a key part of your financial plan, as investing in markets is one of the best ways to achieve long-term growth. It's important that you work with a company or person you can trust, because it's your money and you are investing in your future.
Is it better to invest in a 401k or brokerage account? ›
Brokerage accounts are taxable, but provide much greater liquidity and investment flexibility. 401(k) accounts offer significant tax advantages at the cost of tying up funds until retirement. Both types of accounts can be useful for helping you reach your ultimate financial goals, retirement or otherwise.
Should I keep all my money in a brokerage account? ›
If you've got a large chunk of cash, you might secure better returns outside of a brokerage account. You could lose money. If your money is swept into a money market fund, that cash won't be insured by the FDIC or SIPC. It's possible to lose money.
What is the downside to a brokerage account? ›
Brokerage accounts don't offer all the services that a traditional bank offers. Brokerages might not offer additional products such as mortgages and other loans. Brokerages may not have weekend or evening hours.
Your broker will have a record that you are the actual owner and you are free to buy and sell your investments as you please. They belong to you and there is plenty of evidence to back that up. Securities are held in street name because it's more beneficial for investors that way.
Is it wise to open a brokerage account? ›
Assuming you're already fully funding an employer-sponsored retirement account such as a 401(k) or individual retirement account (IRA), have an emergency fund and don't have excessive credit card debt, a brokerage account can be a useful addition to your financial portfolio.
Do you pay taxes on a brokerage account if you don't sell? ›
In many cases, you won't owe taxes on earnings until you take the money out of the account—or, depending on the type of account, ever. But for general investing accounts, taxes are due at the time you earn the money. The tax rate you pay on your investment income depends on how you earn the money.
Is there a penalty for withdrawing from a brokerage account? ›
There are no tax "penalties" for withdrawing money from an investment account. This is because investment accounts do not receive the same tax-sheltered treatment as retirement accounts like an IRA or a 403(b). There are also no age restrictions on when you can withdraw from your investment account.
Is brokerage cash my money? ›
Brokerage cash is a top-line cash total in your investing account. It's the cash amount before stripping out items like unsettled trades and collateral. Buying power is the bottom-line amount of cash available to you immediately. It might be called "cash available for withdrawal" or some variant on that.
What brokerage should I use to start day trading? ›
Interactive Brokers (IBKR) remains firmly entrenched as our overall pick as Best Online Broker for Day Trading because it offers among the widest ranges of assets available to trade while charging some of the lowest commissions and margin rates in the industry.
Should I keep more than 500k in a brokerage account? ›
They must also have a certain amount of liquidity on hand, thus allowing them to cover funds in these cases. What this means is that even if you have more than $500,000 in one brokerage account, chances are high that you won't lose any of your money even if the broker is forced into liquidation.
Can I open a brokerage account with $500? ›
You can start investing $500 by selecting an investment account, deciding whether you want help and diversifying with ETFs. In general, you should plan to stay invested for at least five years.
What is a normal brokerage account? ›
A brokerage account is an investment account that allows you to buy and sell a variety of investments, such as stocks, bonds, mutual funds, and ETFs. Whether you're setting aside money for the future or saving up for a big purchase, you can use your funds whenever and however you want.
