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

A brokerage account is an investment account that allows you to buy and sell investments like stocks, bonds and mutual funds.
Dec. 3, 2018
Brokers, Investing, Investments
5 Signs It's Time to Switch Online Brokers
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We adhere to strict standards of editorial integrity. Some of the products we feature are from our partners. Here’s how we make money.

What is a brokerage account?

A brokerage account is an investment account. Once you’ve deposited money into a brokerage account, you can use that money to buy investments like stocks, bonds and mutual funds.

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.

Retirement account

This is a tax-advantaged brokerage account specifically designed for your retirement savings, such as a Roth or traditional IRA. 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. When comparing brokerage account providers, look for one with a low account minimum and no account fees.

You’ll also 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 check all of the above boxes:

Trade Fee

$4.95

$4.95

Account Minimum

$0

$0

Promotion

Up to $3,500

Up to $3,500

in cash bonus with a qualifying deposit

Trade Fee

$6.95

$6.95

Account Minimum

$0

$0

Promotion

$100-$600

$100-$600

in cash bonus with a qualifying deposit

Trade Fee

$6.95

$6.95

Account Minimum

$500

$500

Promotion

60

60

days of commission-free trades with a qualifying deposit

» 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:

Management Fee

0.25%

0.25%

Account Minimum

$500

$500

Promotion

$5,000

$5,000

amount of assets managed for free

Management Fee

0.25%

0.25%

Account Minimum

$0

$0

Promotion

Up to 1 year

Up to 1 year

of free management with a qualifying deposit

Management Fee

0.40%-0.50%

0.40%-0.50%

Account Minimum

$0

$0

Promotion

$10,000

$10,000

amount of assets managed for free for one year

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.

Curious what your excess cash is costing you? Run your own numbers with the calculator.

METHODOLOGY

This survey was conducted online within the United States by The Harris Poll on behalf of NerdWallet from June 14-18, 2018, among 2,024 U.S. adults ages 18 and older. This online survey is not based on a probability sample and therefore no estimate of theoretical sampling error can be calculated. For complete survey methodology, including weighting variables and subgroup sample sizes, please contact Julianne Rowe at jrowe@nerdwallet.com.

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