What Is a Brokerage Account? Where and How to Open One

What is a brokerage account?

A brokerage account is a type of investment account opened with a brokerage firm, such as Fidelity, Charles Schwab or E*TRADE.

Many investors use brokerage accounts to buy investments online. You can use a brokerage account to buy stocks, bonds, mutual funds or even more complex investments like cryptocurrency.

A brokerage account doesn't have limits on how much you can contribute, and you can pull your money back out whenever you want. In some cases, that may require selling investments so you can withdrawal cash.

» Wondering how much your money could grow? Estimate your returns with our investment calculator

How to open a brokerage account

Once you select a broker, you can typically open an account with the firm in under 15 minutes. Like a bank account, you'll fill out an application that asks for your name, address, Social Security number, and other types of personal information to prove that you are who you say you are. In most states, you must be 18 to open your account, but parents can set up a brokerage account for their kids.

There should be no fee to open a brokerage account, and many brokerage firms don't require a minimum deposit to get started. You can move money into the account from your checking or savings account or another brokerage account.

Some brokers make you verify a transaction before you can begin purchasing investments. If that’s the case, you’ll have to wait until the broker deposits a small sum in your bank account — typically a few cents. Then, you’ll confirm the transaction by telling the brokerage the amount deposited. The broker can walk you through the process if you have any questions.

Remember, any money you transfer or investments you purchase in the brokerage account are yours, and you are free to sell your investments anytime. The broker merely holds your account and acts as a middle party between you and the investments you want to buy. Depending on your goals, you can also choose to open more than one brokerage account.

» Ready to get started? View our picks for the best brokers for beginners

Video guide to opening a brokerage account

This is not financial advice nor is this a recommendation of M1 or any investments or strategies discussed in this video. Content is for demonstration purposes only.

Where to open a brokerage account

The type of brokerage account provider you choose largely depends on whether you want to manage your own investments or gain access to help.

Online brokerage account

If you want to purchase and manage your investments, an online brokerage account is for you. An account with an online brokerage company enables you to buy and sell investments through the broker’s website. Discount brokers offer a range of investments, including stocks, mutual funds and bonds.

» View our picks for the best online brokerage accounts

Managed brokerage account

A managed brokerage account is exactly what it sounds like — your investments will be picked and managed for you, either by a financial advisor or something called a robo-advisor. A robo-advisor provides a lower-cost alternative to hiring a human investment manager. Robo-advisors use computer programs to choose and manage your investments based on your goals and timeline.

» View our picks for the best robo-advisors

How to invest with a brokerage account

Once you've opened and funded your account, you might be wondering how to ... well, actually invest. Which investments you choose will depend on the type of account you opened, your risk tolerance, your timeline and your investing goals.

If you've decided to open the account at a robo-advisor or other type of investment management service, the work is largely off your shoulders. You'll generally be asked some questions about your investment timeline — how long you plan to leave your money invested — and how much risk you're willing to take. After that, the advisor will recommend a selection of investments (called a portfolio). While these portfolios are also managed automatically by the service, you can make adjustments or change your preferences as you go.

If you've decided to open a brokerage account and pick investments yourself, you'll want to brush up on the different types of investments available to you. Beginner investors often invest in mutual funds or index funds, which are "baskets" that include many different investments or track a stock market index. For example, you can invest in an S&P 500 index fund, which will try to match the performance of the S&P 500, which includes the stocks of around 500 large companies. If you need some more help getting started, check out our guide on how to start investing.

How taxes work with a brokerage account

The act of opening a brokerage account doesn’t mean you’ll be on the hook for additional taxes. However, investment income within a brokerage account — for example, the profits from selling your investments — is subject to capital gains taxes. This is why brokerage accounts are also sometimes called “taxable accounts.”

Generally, you only pay capital gains taxes when you've earned income on your investments — so while taxes are viewed as a "bad" thing and savvy investors try to minimize them, they're a signal that your investments are doing well and the value of them is growing. Here's a general overview of common tax scenarios you can encounter when selling investments.

• Short-term vs. long-term capital gains tax rates: If you buy stock through a brokerage account, you’ll probably have to pay capital gains tax if you sell it for a profit later. How much tax you pay depends on how long you owned the stock before selling it. If you sell a year or less after buying, you may have to pay short-term capital gains tax, which is usually your ordinary income tax rate (10% to 37%). This is often higher than the long-term capital gains rate (0% to 15%) for stocks that are held for longer than a year before sale.

• Investment losses: If you sell an investment for a loss, you can use that loss to offset some of your gains and reduce your capital gains tax burden. If your overall losses are more than your gains, you could also deduct up to $3,000 of those losses from your regular income on your tax return.

• Dividends: If the stock or fund you buy through a brokerage account pays dividends — which are distributions of company profit to people who own the stock — you’ll have to pay taxes even if you choose to reinvest them. If this is the case, your brokerage will send you a 1099-DIV tax form to include in your tax return.

When possible, aim to hold your investments for a long time.

"The benefit of the brokerage account is leveraging the long-term capital gains tax," said Delyanne Barros, founder of Delyanne The Money Coach, in an email interivew. "In order to do that, you must be a long-term investor. That means you have to hold your investments for over a year. Not only will this help you capture the most favorable tax bracket, but it will likely result in better returns."

The key to achieving this? Stay invested, ignore the day-to-day stock market noise and go live your life, said Barros.

What is the difference between a brokerage account and a retirement account?

There are very few rules for brokerage accounts. You can pull your money out anytime, for any reason, and invest as much as you’d like. That's often not true of retirement accounts. Here's an overview of the major differences:

Wendy Moyers, a certified financial planner at Chevy Chase Trust in Bethesda, Maryland, says the ideal situation is to have both a taxable brokerage account and a retirement account, but it can depend on your goals.

"If you want to save money to buy a house, a brokerage account would be more appropriate," Moyers says. If you want to invest for retirement, consider opening a retirement account rather than a taxable brokerage account.