Brokerage Account: What It Is and How to Open One

Opening a brokerage account is the first step to buying stocks, bonds, mutual funds and other investments.
Pamela de la Fuente
Arielle O'Shea
By Arielle O'Shea and  Pamela de la Fuente 
Updated
Edited by Chris Davis Reviewed by Michael Randall
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Nerdy takeaways
  • A brokerage account is an investment account used to trade assets such as stocks, bonds, mutual funds and ETFs.

  • Two brokerage account options meet the needs of most investors: online brokers and robo-advisors.

  • Setting up a brokerage account is simple. You can typically complete an application online in under 15 minutes.

What is a brokerage account?

A brokerage account is an investment account from which you can purchase investments such as stocks, bonds and mutual funds. You can add money to a brokerage account, similar to depositing funds into a bank account. Brokerage accounts have no contribution limits or early withdrawal penalties. They offer flexibility but lack the tax benefits found in retirement accounts.

» Already know the basics? Learn how to open a brokerage account

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How do brokerage accounts work?

You can open a brokerage account quickly online. Many brokerage firms allow you to open an account with no up-front deposit. However, you will need to fund the account before you buy investments. You can move money from your checking or savings account or another brokerage account.

You own the money and investments in your brokerage account and can sell investments anytime. The broker holds your account and acts as a middleman between you and the investments you want to buy.

There is no limit on the number of brokerage accounts you can have or the amount of money you can put into a taxable brokerage account each year. There should be no fee to open a brokerage account.

» View our picks for the best brokerage accounts

How to choose a brokerage account provider

There are two main options for where to open a brokerage account: online brokers and robo-advisors. Both offer retirement accounts and taxable brokerage accounts.

"You want to be careful with which company you open your brokerage accounts with," says Wendy Moyers, a certified financial planner at Chevy Chase Trust in Bethesda, Maryland. "And you should be walking in with an awareness of what you’re going to be investing in. You want to do a little research."

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.

Managed brokerage account

A managed brokerage account comes with investment management from a human investment advisor or a robo-advisor. A robo-advisor provides a low-cost alternative to hiring a human investment manager. These companies use computer programs to choose and manage your investments based on your goals and timeline. Robo-advisors may be a good fit if you want to be hands-off about your investments.

» Ready to get started? See our list of the best robo-advisors

🤓Nerdy Tip

It generally isn't wise to invest money you need within the next five years. If you’re saving for a short-term goal, skip the brokerage or investment account and consider these options for short-term investments.

How to open a brokerage account

Setting up a brokerage account is simple. You can typically complete an application online in under 15 minutes. In most states, you must be 18 to open your account. But parents can set up a brokerage account for their kids.

Once you've opened the account, you need to deposit or transfer funds before you can invest. That sounds complicated, but these days, it’s pretty simple to link your bank account with a brokerage account online.

Some brokers make you verify a transaction. 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. After the transfer is complete and your brokerage account is funded, you can start investing.

Your brokerage account may ask you if you'd like to enable margin trading. A margin account allows you to borrow money from the broker to make trades. You'll pay interest for margin trading, though, and it's risky. Generally, it's best to stick with a cash account at first.

» Looking for some guidance to start investing? Here's how to invest in stocks

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Brokerage accounts are taxable accounts

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 — the profits from selling your investments — is subject to capital gains taxes. This is why brokerage accounts are also called “taxable accounts.” Retirement accounts (such as IRAs) follow different tax and withdrawal rules that can benefit retirement savings and investing.

But that doesn't mean brokerage accounts are "non-taxed advantaged”, according to Delyanne Barros, founder of Delyanne The Money Coach.

"The benefit of the brokerage account is leveraging the long-term capital gains tax," she said in an email interview. "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." Depending on your taxable income and filing status, the long-term capital gains tax rate is 0%, 15% or 20%

IRS. Capital Gains and Losses. Accessed May 30, 2024.
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The key to reaping a brokerage account's advantages, Barros said, is to stay invested, ignore the day-to-day stock market noise, "and go live your life." Here are five brokerage account tax tips to keep in mind.

  1. 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. 

  2. If you sell a stock a year or less after buying it, you may have to pay short-term capital gains tax. This is usually your ordinary income tax rate and is often higher than the long-term capital gains rate.

  3. 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.

  4. If the stock or fund you buy through a brokerage account pays dividends, you’ll have to pay taxes even if you choose to reinvest them. If this is the case, your brokerage will send the relatively uncomplicated DIV-1099 tax form to include in your tax return.

  5. If you invest through a retirement account, you typically won’t have to worry about this.

Other investment accounts

In a standard brokerage account you're contributing post-tax money. In most cases, your investment earnings will be taxed. On the plus side, 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.

In a Roth IRA, you also contribute post-tax money. Once you reach 59½ and have held your account for at least five years, you can withdraw your money, including earnings, without paying additional taxes.

Publication 590-B (2020), Distributions from Individual Retirement Arrangements (IRAs). Distributions from Individual Retirement Arrangements (IRAs). Accessed May 30, 2024.

"Ideally, you should have both, but prioritizing the Roth IRA is best so you can grow your money tax-free," said Barros.

Moyers also says the ideal situation is to have both, but it depends on your goals. An IRA is a good way to save money for retirement. But, she says, you are tying your money up for a long time.

"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.

You might already be investing for retirement through your work. Many companies offer an employer-sponsored plan such as a a 401(k) and match your contributions. You can still open an IRA, but we recommend contributing at least enough to your 401(k) to earn that match first.

The table below compares brokerage accounts with retirement accounts.

Brokerage account

Retirement account

Taxes

May incur capital gains tax on investment income

Investments sold 1 year or less after buying are subject to ordinary income tax

Typically no capital gains

Tax-deferred or tax-free growth

Contributions

Unlimited

Caps on annual contributions

Withdrawals

No limits or penalties

Penalties for withdrawing before a certain age, unless exceptions are met

Used primarily for

Stock trading, options trading, additional long-term investments after maxing out retirement accounts

Long-term growth, retirement savings

Frequently asked questions

Most brokers don’t require an account minimum to get started. Remember, though, that an account minimum differs from an investment minimum. An account minimum is the amount you need to deposit into the brokerage account just to open it. An investment minimum, on the other hand, is the smallest amount of money required to buy into a particular asset. Some mutual funds require a minimum investment of $1,000 or more. However, you can typically find low- or no-minimum funds at many brokers.

Whether you should open an IRA or taxable brokerage account first depends on your situation and investment goals. Financial planners often recommend, first and foremost, contributing at least enough to a company’s 401(k) plan to earn the company’s match, if possible.

If not, opening an IRA before a brokerage account may make sense, as IRAs have considerable tax advantages and are built for long-term growth.

A brokerage account could be the next step if you have an IRA and are already maxing it out and either don’t have access to a 401(k) through work or are already contributing at least enough to get your company’s match.

There are a few steps to getting money out of your brokerage account. If your money is invested, you’ll have to sell that asset first. Once the sale goes through and the money is available as cash in your account — which, these days, happens fairly instantaneously — you’ll still have to wait one day before withdrawing that cash. Once the trade “settles,” you can withdraw the money.

Financial institutions used to deliver transactions within two business days, also known as T+2. But on February 15, 2023, the U.S. Securities and Exchange Commission ruled to shorten the transaction to settlement time period to one day. T+1 went into effect on May 28, 2024.

Under normal circumstances, there shouldn’t be any problem getting cash out of your brokerage account, but keep in mind that it may not be instantly available in your bank account. This process is much faster for brokerages that offer cash management and brokerage services.

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