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What Is a Brokerage Account and How Do I Open One?

Brokers, Investing, Investments
5 Signs It's Time to Switch Online Brokers

What is a brokerage account?

A brokerage account allows investors to buy and sell stocks, bonds and mutual funds, and perhaps to get into more advanced investments such as currency, futures and options contracts.

Some brokerage accounts are taxable, which means the money you earn from investments within the account can be subject to capital gains taxes. But if your goal is to invest for retirement, you could open an IRA or Roth IRA at your broker to gain special tax benefits.

Is a brokerage account right for you?

Yes, a brokerage account is best if …

  • You’re investing for something other than retirement, won’t need the money in the next five years and are interested in managing your own investments. Here are our top picks for best online brokers.
  • You want to save for retirement and you’re already getting all the free money available through your 401(k) match. In this case, look to a brokerage for a Roth or traditional IRA to get important tax benefits. Here are our picks for the best IRA providers.

Other accounts might be a better fit if …

How to choose an online broker

You’ll likely want to open an account with an online broker, which will allow you to trade investments easily via its website or trading platform. Before you open an account, figure out which online broker is best for you, based on a few key factors:

  • Commissions: Nearly all online brokers will charge a trade commission, typically $5 to $10 per trade. (One notable exception: Robinhood offers commission-free trades.) A broker’s commission will apply to trades of stocks, options and exchange-traded funds. You may also be charged a transaction fee for buying mutual funds; however, many brokers offer commission-free ETFs and no-transaction-fee mutual funds.
  • Account fees: These include annual fees, inactivity fees, and extra charges for trading platforms, research and data. These charges can be avoided completely in many cases by choosing the right broker.
  • How often you plan to trade: If you plan to trade frequently, you’ll want to find a broker with low commissions. If you don’t anticipate trading often, be sure the broker doesn’t charge inactivity fees.
  • Support: Brokers offer varying levels of educational resources and forms of customer support. Make sure the one you choose meets you where you are.
  • Minimums: A broker’s minimum deposit requirement can range from $0 to $2,500 or more.

If you’re getting started investing, here are a few brokers that do a good job on these factors and give you a solid foundation while your skills and strategy develop:

NerdWallet rating

Fees

$6.95

per trade

Account minimum

$0

Promotion

$100-$600

in cash bonus with a qualifying deposit

The bottom line

Merrill Edge offers high-quality customer service, robust research and low fees. Customers of parent company Bank of America will love the seamless, thoughtful integration, with a single login to access both accounts.

Show pros & cons

Pros

  • Robust third-party research.

  • Ongoing promotions.

  • Integrated with Bank of America.

  • Free trades for eligible Bank of America customers.

Reader favorite

Cons

  • No commission-free ETFs.

  • Minimum balance requirement for active trading platform.

Read full review
NerdWallet rating

Fees

$4.95

per trade

Account minimum

$0

Promotion

$50 - $3,500

in cash bonus with a qualifying deposit

The bottom line

Ally Invest’s robust trading platform and lineup of free research, charting, data and analytical tools make it a good choice for active traders. But it’s also appropriate for beginning investors who will appreciate that there is no account minimum and no annual fees.

Show pros & cons

Pros

  • Low commissions.

  • No account minimum.

  • Strong web-based platform.

  • Robust research and tools.

Reader favorite

Cons

  • No commission-free ETFs.

  • No no-transaction-fee mutual funds.

Read full review
NerdWallet rating

Fees

$6.95

per trade

Account minimum

$500

Promotion

60

days of commission-free trades with a qualifying deposit

The bottom line

E-Trade has long been one of the most popular online brokers, largely because of its easy-to-use tools. They offer a tiered commission structure that favors frequent traders but can add up to high costs for casual investors.

Show pros & cons

Pros

  • Easy-to-use tools.

  • Large investment selection.

  • Excellent customer support.

  • Access to extensive research.

  • Advanced mobile app.

  • Reduced commissions for frequent traders.

Reader favorite

Cons

  • Higher commissions for low-volume traders.

  • Minimum balance requirement for active trading platform.

Read full review

» Want to see more? Check out our roundup of the best brokers for beginners

How to open a brokerage account

Once you’ve settled on a broker, signing up for an account will likely require your:

  • Social Security or tax ID number
  • Driver’s license or other government-issued ID
  • Address
  • Employment status
  • Annual income and net worth
  • Date of birth (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)

You’ll need to initiate a deposit or funds transfer (often of a minimum amount, as noted above). 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 just risky to play around with margin. Best to stick with a cash account, especially as you get started.

OK, what’s next?

Armed with what to look for (and look out for), it’s time to pick a broker. We’ve spent hundreds of hours reviewing provider pros and cons, broken down by features and current promotions. Choose the best for how you want to invest.

Read: Best brokers for stock trading »

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