The first step to investing is opening an investment account called a brokerage account. You can use the money you deposit into a brokerage account to buy stocks, bonds and other investments.
Definition of a brokerage account
A brokerage account is an investment account. You can open and fund a brokerage account at a brokerage firm. The firm helps you place investment orders, and typically collects a commission for doing so.
Brokerage accounts offer you access to a range of different investments, including stocks, bonds, mutual funds, index funds and exchange-traded funds. Many brokers also offer more complex investments, like options, forex or futures, as well as safer investments like CDs, bonds and cash management accounts.
How does a brokerage account work?
Once you’ve opened your brokerage account, you’ll need to deposit money before you can invest. You can do this via a transfer from your checking or savings account or by mailing in a check. You can also transfer money from one brokerage account to another if you decide to change brokerage firms.
You own the money and investments in your brokerage account, and you can sell investments and withdraw that money at any time. The brokerage firm holds your account and acts as an intermediary between you and the investments you want to purchase.
There is no limit on the number of brokerage accounts you can have, or the amount of money you can deposit into a brokerage account each year. However, brokerage accounts may have minimum investment requirements for opening the account.
Brokerage accounts are sometimes called taxable investment accounts, because investment gains and income are taxed in the year they are earned.
Which investment account is right for you?
There are several types of brokerage accounts. Which is right for you will depend on your investing goals, what kind of investments you plan to purchase and how much help you’d like in choosing and managing those investments.
Online or discount brokerage account
This is an investment account with an online brokerage company, like E-Trade or Merrill Edge. These companies allow investors to purchase and trade investments on their own, through online trading platforms. If you want to purchase and manage your own investments, an online brokerage account is for you. Here are our picks for the best online brokers.
Managed or full-service brokerage account
This is a brokerage account that comes with investment management, either from a human investment advisor or a robo-advisor. A robo-advisor is a low-cost alternative to a human investment manager; these services use computers to choose and manage your investments for you, based on your goals. Here are our top picks for robo-advisors.
This is a tax-advantaged investment account specifically designed for your retirement savings, such as a Roth or traditional IRA. Because of that, unlike taxable brokerage accounts, retirement accounts place restrictions around when and how you can withdraw the money.
If you want to invest for retirement (and you’re already contributing enough to earn a 401(k) match, if your employer offers one), you should open an IRA. You can open an IRA at an online broker or robo-advisor. Here are our picks for the best IRA providers.
Note: We don’t recommend investing 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 choose a brokerage account
Once you’ve decided which type of investment account you want, you’ll want to choose an account provider. These days, many brokers require no minimum investment to open an account, and there should be no fee.
When comparing brokerage account providers, you’ll want to look at what the broker charges for the investments you’re interested in: If you want to trade stocks, look for a broker with a low trade commission. If you are a mutual fund investor, choose a broker that offers no-transaction-fee mutual funds and commission-free exchange-traded funds.
The below brokers have low costs and are ideal for beginners:
» Want to see more? Check out our roundup of the best brokers for beginners
If you’re not interested in managing your own investments, you may want to go with a robo-advisor. As noted above, these services will manage your portfolio for a low annual fee. Here are some of our picks for the best robo-advisors:
How to open a brokerage account
Setting up a brokerage account is a simple process — you can typically complete an application online in under 15 minutes. (In most states, you’ll need to be 18 to open your own account, but here’s how parents can set up a brokerage account for their kids.)
Once you’ve opened the investment account, you’ll need to initiate a deposit or funds transfer. The funds transfer process can take anywhere from a few days to a week. Once that is complete, you can begin investing.
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.
» Looking for some guidance to start investing? Here’s how to invest in stocks
Nervous about investing?
Given a long time horizon, money invested in the stock market can grow tenfold, compared to sitting in cash or a low-rate savings account where you run the risk of actually losing purchasing power to inflation.
But despite that, 39% of Americans say they aren’t investing, according to a 2018 online survey commissioned by NerdWallet and conducted by The Harris Poll. Of them, 32% say they prefer to have money in cash versus investing because it’s easier to access their money, and 28% say they prefer to hold cash because they don’t know how to invest (that’s where the aforementioned robo-advisors can come in handy). Another 28% think investing is too risky. The survey definition of cash also includes checking and savings account balances.
In reality, when you’re investing for a long-term goal like retirement, not investing is risky — most people simply can’t save enough to fund their retirement needs. Stock market returns pick up the slack.
According to NerdWallet’s survey, Americans on average currently hold $32,286 in cash. (Worth noting: The median amount Americans have in cash is just $2,000, suggesting some wealthy savers are skewing the average figure.)
While everyone should have some emergency cash on hand, anyone who keeps excess cash is doing so at a cost. Our calculations show that over 30 years, every $10,000 kept in cash instead of investing amounts to roughly $44,000 in lost returns.