A brokerage account is where you may trade securities like stocks and ETFs to build wealth without the rules and restrictions of retirement accounts.

  • Brokerage accounts allow you to buy, sell, and hold securities such as stocks, mutual funds, ETFs, etc.
  • Unlike retirement accounts, brokerage accounts don’t offer any special tax benefits. They are, however, free of restrictions on contributions and withdrawals.
  • Brokerage accounts may be a good way to invest for long-term growth, but select your securities with caution, as they may fluctuate in value.

Chances are you may already have a savings, checking, or retirement account. However, if you plan to do any sort of investing, then you’ll also need what’s known as a brokerage account.

Here’s what a brokerage account is, how it works, and why it might be helpful to your financial future.

What Is a Brokerage Account?

A brokerage account is a type of investment account that allows you to buy, sell, and hold financial securities.

The term “broker” refers to someone who places trades on behalf of their customer. Because investors cannot buy shares directly from the financial markets, they must utilize the service of a broker to carry out this transaction for them. Hence, the brokerage acts as the intermediary, and your brokerage account holds the financial assets once acquired.

How Does a Brokerage Account Work?

Brokerage accounts are very common and straightforward to use.

  • After opening an account with a provider of your choice, you may be asked to link it to your bank. This is so that money may be transferred directly to fund any purchases.
  • Next, you may use the brokerage’s client platform to find and research different securities. Providers may vary in the amount of information and data made available. Some offer “premium” upgrades that give access to interactive charts, industry reports, etc.
  • Once you’re satisfied with a particular investment, type in the quantity of shares or dollar amount you’d like to purchase. Hit the “Buy” button, and the brokerage will typically execute your trade.
  • As you continue to build your portfolio, periodically check the performance of each investment. If you’re ever unsatisfied or wish to hold other securities, then you may always sell them for cash or trade for other ones.

Self-Directed vs. Guided Brokerage Accounts

When opening your brokerage account, you may be asked if you’d like to open one of two types:

  • Self-directed brokerage account: This allows you to buy, sell, and manage your investments at your discretion.
  • Guided brokerage account: This connects you with a financial professional who makes investment selections for you based on your financial goals and tolerance for risk. This option generally requires a minimum investment amount and may charge additional fees for its service.
  • How Does a Brokerage Account Differ from Other Accounts?

Brokerage accounts serve a different purpose than a regular bank or retirement account.

  • Compared to a savings and checking account with a bank or credit union: You may hold financial assets beyond cash or cash-related products, such as Certificates of Deposit (CDs). You also wouldn’t typically use your brokerage account to pay bills or withdraw cash as needed.
  • Compared to a retirement account such as a 401(k) or IRA: There are no special tax incentives like tax-deferred growth or tax-free withdrawals. However, you’re also free to contribute as much as you like and make withdrawals without restriction.

Key Features and Benefits of a Brokerage Account

There are several important benefits to using a brokerage account.

Wide Range of Investment Choices

Brokerage accounts may be used to buy, sell, and hold any of the following:

Additionally, many brokerages now offer high-yield interest. This may make them a good place to park any unused cash (such as an emergency fund).

Potential for Growth

Many people use brokerage accounts to invest in assets with growth potential that exceeds the interest they might receive from a bank account. Depending on the type of securities held and market conditions, this may result in capital appreciation, capital gains, dividends, and interest payments. Over time, the power of compounding returns may enable the account balance to multiply in value.

No Contribution Limits

There are no restrictions as to how much you’re allowed to put into your brokerage account each year. By contrast, a 401(k) retirement plan limits you to $24,500 per year (with additional contributions if you’re age 50 and older). IRAs have even lower contribution maximums at $7,500 per year.[1]

No Early Withdrawal Penalties

Since there are no tax incentives to holding assets inside a brokerage account and it’s funded with after-tax money, you’re free to sell your investments and withdraw the funds at any time. Compared to retirement accounts, this may be a big advantage because you’ll avoid the 10% penalty requirement for withdrawals taken before age 59-1/2.

Considerations and Risks

Before opening a brokerage account, there are a few important points to consider.

Investment Risk

Unlike money in a bank, the value of your investments may fluctuate or lose value. This may depend on the type of securities you choose to purchase and on market conditions. Therefore, it’s highly recommended that you only invest with money you don’t require in the near term.

Taxes on Brokerage Accounts

Because brokerage accounts aren’t tax-advantaged, you may be required to report any interest, dividends, or capital gains received on your annual tax return. Many brokerages provide a tax statement at the end of the year that summarizes this information.

SIPC Protection

Whereas bank accounts carry Federal Deposit Insurance Corporation (FDIC) insurance, brokerage accounts have what’s called Securities Investor Protection Corporation (SIPC) insurance. The SIPC is a nonprofit organization created by the US government to protect investors in the event of a brokerage failure.

The limit of SIPC protection is $500,000. This includes up to $250,000 for any cash that was held within the brokerage account.[2]

Frequently Asked Questions

Do brokerages charge any fees or minimums?

To be competitive, many brokerages now offer zero-commission trades and do not require a minimum balance for self-directed accounts. However, some fees may apply for advisory services.

How many brokerage accounts can you have?

There are no official limits as to how many brokerage accounts you can have. However, due to tax reporting requirements, it may be more convenient to hold a small number of accounts.

Is your money safe in a brokerage account?

If the brokerage company itself files for bankruptcy, then SIPC insurance may help you recover some of your funds. However, this protection does not extend to the performance of the investments you choose to own. Therefore, care should be taken when selecting which securities to buy.

When should you use a retirement account instead of a brokerage account?

Retirement accounts are typically for money that you don’t need until you’re older – potentially decades away for some investors. With such a long time horizon, it may make sense to utilize the tax advantage or receive matching contributions (if your employer offers them).

Final Thoughts

Knowing what a brokerage account is and how it’s different from other types of accounts may help you to invest for different financial goals. Although brokerage accounts don't have any unique tax advantages like a 401(k) or IRA, you are free to contribute as much as you like and make withdrawals without incurring a penalty.

Brokerage accounts allow you to buy any security on the market. However, this should be done with care since investments have the potential to decrease in value. Please consult with a licensed financial professional if you need guidance or recommendations.