Key takeaways
- A brokerage account is an investment account at a registered brokerage firm for buying and selling stocks, bonds, mutual funds and ETFs.
- The two general types are cash accounts, where you pay in full, and margin accounts, where the firm lends you money against your securities.
- Some applications make margin the default, so the SEC advises confirming the account type before you sign.
- Expect to provide identity, financial and tax details, investment objectives and risk tolerance; brokers need these to comply with regulations.
- Read the firm's Form CRS, check its background, understand its fees, and check how uninvested cash is handled and protected.
Buying a share of stock means buying it through someone: in the United States, a registered brokerage firm. The account you hold with that firm is a brokerage account. Investor.gov defines it as an investment account at a registered brokerage firm that allows you to buy and sell a variety of investment products, such as stocks, bonds, mutual funds and exchange-traded funds. The SEC's investor bulletin on opening one walks through what to expect, and this guide follows it.
Cash accounts and margin accounts
| Cash account | Margin account | |
|---|---|---|
| Paying for purchases | You must pay the full amount | You can borrow from the firm to buy securities |
| Collateral | Not applicable | The securities in the account secure the loan |
| Cost | No borrowing cost | Interest on the money borrowed |
| Risk | Limited to what you invest | Greater purchasing power, and the potential for larger losses |
The SEC's bulletin puts one warning in capital letters: some brokerage account applications make margin accounts the default account type, so confirm you are opening the type you want before you sign. Cash account versus margin account explains the rules for each.
A brokerage account also differs from an investment advisory account, which is generally governed by different rules. In a brokerage account you generally make your own investment decisions.
What opening one asks for
Brokers request personal, financial and tax information because they need it to comply with laws and regulations. The SEC lists what a broker will likely ask:
- Identity and contact: name, Social Security or taxpayer identification number, address, phone, email, date of birth and a government-issued ID such as a driver's licence or passport.
- Trusted contact information: details of a person the firm can contact.
- Employment: your status and occupation, and whether you work for a brokerage firm.
- Finances: annual income and net worth.
- Investment profile: objectives and risk tolerance, other investments, experience, time horizon and liquidity needs.
You will also choose an investment objective. The SEC notes that firms use different terms, such as "capital preservation", "income", "growth", "moderately aggressive", "aggressive growth" and "speculation", and advises making sure you understand how much risk each involves and when you will need access to the money. Risk tolerance covers how to answer honestly.
Other choices at sign-up
Uninvested cash. You may be asked to choose a cash management option, or the firm may pick one by default: a bank sweep into deposit accounts, a sweep into money market funds, or leaving cash in the account. The SEC notes these differ in interest rates and in protection, FDIC or SIPC, and that the firm may have a financial incentive to favour one.
Statements and confirmations. Brokers are generally required to send them, on paper or electronically. The SEC advises always checking them, and contacting the firm promptly about errors or transactions you did not make or authorise.
Discretionary authority. You can give a broker limited authority to make decisions for you, but this requires written authorisation, and the SEC notes that granting it does not make the broker an investment adviser.
Fees to understand first
The SEC lists two families of fees, which vary among firms:
| Type | Examples |
|---|---|
| Transaction costs | Commissions; markups and markdowns when a firm trades from its own inventory; loads on some mutual funds |
| Account fees | Maintenance fees on small accounts; inactivity fees; closing fees; margin interest; wire and transfer fees |
The SEC adds that certain investments, such as mutual funds, ETFs and variable annuities, are likely to carry additional fees of their own. A recurring fee works like a negative return: a hypothetical $25 annual maintenance fee is 2.5% a year on a $1,000 account, but 0.25% on a $10,000 one.
Checking the firm and protecting the account
Before opening an account, the SEC advises reading the firm's relationship summary, Form CRS, and checking the broker's background and disciplinary history; Investor.gov has a free search tool for this. Unexpected contact from someone offering to open an account for you, or asking you to pay anyone other than the firm, is a warning sign covered in investment fraud red flags.
If a SIPC-member firm fails, cash and securities it holds for you may be protected up to $500,000, including $250,000 for cash; SIPC protection explains what that does and does not cover.
Moving firms later. The SEC notes that a new firm may not accept all your securities, so you may have to leave some behind or sell them, paying fees and possibly tax. Fractional shares generally cannot be transferred; see fractional shares.
Learn to Trade Stocks Beginner, one of our education apps, is not a brokerage: it uses virtual money only, so you can practise orders before opening a real account. The investing basics hub lists the related guides.
Good to know
Frequently asked questions
What is a brokerage account?
What do I need to open a brokerage account?
Is a margin account the default?
What fees do brokerage accounts charge?
Sources
- Investor Bulletin: How to Open a Brokerage Account (opens in a new tab)Investor.gov, U.S. Securities and Exchange Commission — accessed
- Brokerage Accounts (opens in a new tab)Investor.gov, U.S. Securities and Exchange Commission — accessed
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