What Is a Brokerage Account? Where and How to Open One
Opening a brokerage account is the first step to investing. You can open one in as little as 15 minutes, but you'll need to fund it and select investments to start building out your portfolio.
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What is a brokerage account?
A brokerage account is an online investment account that lets you buy and sell securities such as stocks, bonds and mutual funds. Brokerage accounts are offered through online brokers (think Fidelity or Schwab) and typically only take about 15 minutes to set up.
Unlike retirement accounts, brokerage accounts have no contribution limits and no early withdrawal penalties. You can withdraw funds flexibly, though you may need to sell investments first to access cash.
When to open a brokerage account
Determining the right time to open a brokerage account is ultimately up to you. However, you may want to have a solid foundation in place before diving into general investing. This could mean paying off high-interest debt (say, from credit cards) and building up an emergency fund to cover unexpected expenses.
Experts also recommend contributing at least enough to your 401(k) to get your employer match (if they offer one) before investing elsewhere, so you're not leaving free money on the table. After that, you may increase your contributions to your 401(k), invest for retirement through an IRA, open up a brokerage account for general investing, or choose a mix of things.
Nerdy Perspective
A brokerage account is often described as an investment vehicle for long-term goals. That's definitely true, but there's also no right or wrong reason to open a brokerage account. I think they can still be valuable even if you're like me and don’t necessarily have a specific end goal in mind. I have a brokerage account simply because it gives me a flexible way to grow my savings rather than letting that money sit idle.
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 broker lets you buy and sell investments through the broker’s website.
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.
How to open a brokerage account
Once you select a broker, 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 investing. 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.
Remember, any money you transfer or investments you purchase in the brokerage account are yours, and you are free to sell your investments at any time. The broker merely holds your account and acts as an intermediary between you and the investments you want to buy. Depending on your goals, you can also choose to open more than one brokerage account.
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 a good idea to stick with a cash account at first.
How to invest with a brokerage account
Once you've opened and funded your account, you might be wondering how to actually invest. The investments you choose will depend on the type of account you opened, your risk tolerance, your timeline and your investing goals.
If you're using a robo-advisor or other management service
The work is largely off your shoulders. You'll generally be asked some questions about your investment timeline 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're picking investments yourself in a brokerage account
You'll want to brush up on the different types of investments available to you. Beginner investors often invest in index funds or ETFs, which bundle many different investments into one and often track a stock market index. For example, you can invest in an S&P 500 index fund that aims to match the S&P 500's performance. Investing in funds is generally less risky and less research-intensive than building a portfolio of individual stocks.
Good to know: These days, you don't need a ton of money to start investing. Many brokers offer fractional shares, which allow you to buy a portion of a stock or fund in whatever dollar amount you want. If you need some more pointers, check out our guide on how to start investing.
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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. While taxes can sometimes be viewed as a "bad" thing and savvy investors try to minimize them, they're a signal that your investments are doing well. Here's a general overview of common tax scenarios you may 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 20%) 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 — a strategy called tax-loss harvesting. 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: Some investments you buy through a brokerage account might pay dividends, which are distributions investors get from a company's profit. Even if you reinvest these dividends, you have to pay taxes on them. 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 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."
The key to achieving this? Stay invested, ignore the day-to-day stock market noise and go live your life, said Barros.
» Estimate long-term returns: Try NerdWallet's investment calculator
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