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

Brokers, Investing, Investments
What Is a Brokerage Account and How Do I Open One?

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If you want to save, you open a savings (or money market) account. If you want to invest, you need a brokerage account.

A brokerage account allows you to buy and sell everything from stocks and bonds to mutual funds, currency, futures and options contracts, depending on the broker. Over the long term, the return on a diversified investment portfolio is much greater than a savings account interest rate, which likely won’t beat inflation.

They differ from savings accounts in the following ways:

  • Savings accounts don’t offer you access to investments; instead, you’ll earn an interest rate on money deposited.
  • The money in a savings account is FDIC insured up to $250,000 per depositor, per insured bank.
  • FDIC coverage does not insure investments, including stocks, bonds and mutual funds. Brokerage accounts carry a different kind of coverage, called SIPC. This coverage protects customers if a SIPC-member broker fails, but it does not protect against investment losses. SIPC coverage is up to $500,000 per customer per institution, with a $250,000 limit on cash.

There are also some key similarities:

  • You can deposit as much money as you’d like and withdraw that money at any time (though, with a brokerage account, you may have to sell investments to do so).
  • You can set up automatic transfers from another bank or brokerage account, or deposit checks via mail or, in some cases, a mobile app.
  • Like banks, many brokerages also offer checking accounts. You wouldn’t purchase investments through a brokerage checking account, but it could be linked to your investment account, making for easy transfers back and forth.

NerdWallet is a free tool to find you the best credit cards, cd rates, savings, checking accounts, scholarships, healthcare and airlines. Start here to maximize your rewards or minimize your interest rates. Arielle O'Shea

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Brokerage accounts vs. retirement accounts

Brokerage accounts are sometimes called taxable accounts, because the money you earn from investments sold within the account can be subject to capital gains taxes. (Interest from savings accounts and other bank accounts is taxed as income, not capital gains.)

That term also differentiates a standard brokerage account from tax-advantaged retirement accounts, like an IRA or a Roth IRA. These accounts also allow you to invest, but with money specifically designated for retirement. In fact, there are annual contribution limits and often penalties for removing the money before age 59½.

If you’re a beginner investor and your goal is retirement, you should use a tax-advantaged retirement account. If you’ve maxed out your retirement accounts for the year, or you have another goal for which you’d like to invest, you should consider a brokerage account.

Selecting 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. The best of these brokers also provide research, analysis tools and educational support to get you started.

Before you open an account, survey the options to figure out which online broker is best for you, based on key factors:

Commissions: Nearly all online brokers will charge a trade commission, typically $5 to $10 per trade. (The notable exceptions: Robinhood and Loyal3 offer 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 that can be purchased with no transaction costs.

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: What trading technology, educational resources and customer support do you need?

Minimums: A broker’s minimum deposit requirement can range from $0 at a broker like TD Ameritrade or OptionsHouse to $2,500 or more.

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. (Looking to start investing at a younger age? 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.

A word about margin accounts

During the process of opening your brokerage account, you’ll likely be asked if you want a margin account or a cash account. A cash account is a standard brokerage account, as described above.

A margin account allows you to borrow money from the broker in order to make a trade. When you buy on margin, the investments in your account serve as collateral for that loan until you pay it back. And as with any loan, you’ll pay interest — here, that interest is called the margin rate.

If you’re a new investor, stick with a cash account as you get started. It’s risky to play around with margin (the Financial Industry Regulatory Agency provides a good overview of margin risks). Margin accounts also typically carry higher minimum investment requirements of $2,000 or more, even if the broker’s standard minimum deposit requirement is $0.

NerdWallet is a free tool to find you the best credit cards, cd rates, savings, checking accounts, scholarships, healthcare and airlines. Start here to maximize your rewards or minimize your interest rates. Arielle O'Shea

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Arielle O’Shea is a staff writer at NerdWallet, a personal finance website. Email: aoshea@nerdwallet.com. Twitter: @arioshea.

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Best Online Brokers for Stock Trading 2016

September 2, 2016Brokers, Investing

Picking an online broker for your stock trading account is a big decision. The one you choose will impact the investments available to you, the amount you’ll pay to trade them and the way those trades will be executed. Consider which factors matter most to you: Some investors value low commissions above all else, and others are willing to pay more for access to better research or a larger investment selection.

NerdWallet has picked the best online brokers in a variety of categories, so you can quickly determine which one is right for you.

The best overall: NerdWallet’s top online brokers

These brokers have no inactivity fees or account minimum. They offer advanced trading platforms, a breadth of research and access to a wide range of investments.

Both OptionsHouse and TD Ameritrade offer strong customer support, advanced trading platforms with no balance or trade minimums, and an impressive amount of research. TD Ameritrade’s trade commissions are on the high side, but many traders find their first-class trading platforms, Trade Architect and thinkorswim, worth that higher cost. The broker also offers a large selection of no-transaction-fee mutual funds and commission-free ETFs. Although OptionsHouse fails to offer either, it has very competitive commissions for stock, ETF and options trades.

The best online brokers for beginners

These brokers have around-the-clock customer service, a large number of commission-free ETFs and low or no account minimums.

If you’re new to the markets and looking to dabble in a little trading, you may value handholding over fancy tools, research or even low fees. You want to be able to pick up the phone — or visit a branch — and talk to someone who can walk you through your choices. With both TD Ameritrade and Charles Schwab, you can do that (though making a trade through a broker, rather than online, will generally cost extra). They also both offer a wide selection of commission-free ETFs and no-transaction fee mutual funds, as well as educational content to help you gain your footing. Charles Schwab often waives its $1,000 account minimum for investors who agree to auto-deposits of at least $100 a month.

The best online brokers for investment selection

Clients of these brokers can trade a number of asset types, including futures and foreign exchange.

E-Trade and OptionsXpress both offer stocks, bonds, ETFs, mutual funds, futures, and options trading, alongside powerful trading platforms that advanced traders will appreciate. Be sure to compare trading costs for the investments you plan to trade most frequently: For example, futures trading at E-Trade is slightly cheaper at $2.99 per contract (compared with $3.50 at OptionsXpress), but high-volume options traders will save money at OptionsXpress. E-Trade also offers a large selection of no-transaction-fee mutual funds, while OptionsXpress has none — but that broker scores higher marks for its extensive selection of commission-free ETFs.

The best online brokers for research

These brokers offer a depth of high-quality research alongside reasonable commissions.

Research is key to stock trading, and Merrill Edge and Fidelity both stand out here. Fidelity is unmatched among online brokers for offering research from more than 20 providers. Merrill Edge features Morningstar, S&P Capital IQ and Recognia, plus mutual fund reviews from Morningstar and Lipper. Better still, research is free at both brokers, which also charge mid-range commissions.

The best low-cost online brokers

In addition to top pick OptionsHouse — a strong deep-discount broker — these brokers are formidable choices for fee-conscious investors. They both offer rock-bottom commissions, but investors won’t sacrifice much in the way of tools and investment selection.

Stripped-down apps like Robinhood offer commission-free trading. But for investors who want more, TradeKing and Interactive Brokers prove that it’s possible to pair low commissions with advanced features. Both companies score high for their trading platforms and investment selection. TradeKing falls a bit short by not offering futures trading, but the broker has a $0 minimum deposit requirement and lower inactivity fees when compared with Interactive Brokers. Frequent traders will pay less in commissions at Interactive Brokers. It offers volume discounts but requires traders to meet monthly activity minimums and maintain a $10,000 balance.

Not quite ready to open an account?

It’s OK to have cold feet. Check out some of our other brokerage account resources to get more information before making your decision.

  • Read our thorough guide to opening a brokerage account, including the information you’ll want to have available before you start the process.
  • As we said, knowing your trading and investing style is key to choosing a brokerage. Our post about how to choose the best broker for you will help you rank-order your priorities.

Finally, you might be wondering if you have enough money to start investing. The fact is, you can invest with as little as $500 — and in some cases, even less. Exchange-traded funds trade for a share price — like individual stocks — so you can build a diversified portfolio for very little money. Five of the brokers we picked above, including our overall top picks, have no account minimums.

Summary: Best online brokerages

Summary: Best online brokerages

Online Broker
Best for
Account minimum
Start investing


Low commissions; superior tools, particularly for options
per trade
$1,000 in free trade commissions ($5,000+ deposit)

TD Ameritrade

Top research; two powerful trade platforms; educational content
per trade
$100 bonus ($25,000+ deposit)
up to $600 ($250,000+ deposit)

Charles Schwab

Charles Schwab
Among largest selections of commission-free ETFs
per trade
$100 to $500 cash bonus for qualifying deposits of $10,000 or more


Investment selection
Large selection; reasonable commissions and fees
per trade; volume discounts
60 days of commission-free trades ($10,000+ deposit)


Investment selection
Large selection; discounts for high-volume traders
per trade
50 commission-free trades ($5,000+ deposit)

Merrill Edge

Merrill Edge
Breadth of research from other providers and own offering
per trade
$100-$600 cash bonus, depending on account size


Fidelity Investments
Leads on research - reports from 20+ firms
per trade
300 commission-free trades ($50,000+ deposit)
($0 for IRAs)


Low cost
Impressive platform and research depth; low commissions
per trade
$1,000 in commission-free trades ($5,000+ deposit)

Interactive Brokers

Low cost
Discounts for frequent traders; among best platforms
per share;
min. $1, max. 0.5% of trade value
Special terms for clients 25 and younger
($5,000 for IRAs)

Arielle O’Shea is a staff writer at NerdWallet, a personal finance website. Email: aoshea@nerdwallet.com. Twitter: @arioshea.