If you want to invest outside your workplace retirement plan, you need a brokerage account. And you do want to invest, because investing is one of the most effective ways to build wealth.
What is 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.
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?
- 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, then a regular, taxable brokerage account is a good choice. Here are our top picks for best online brokers.
- If your goal is to save for retirement, then you should first make the most of the free money available through your 401(k) match. To save beyond this for retirement, turn to a brokerage for a Roth or traditional IRA to get important tax benefits. Here are NerdWallet’s picks for the best IRA providers.
- If you’d rather have someone else do the day-to-day work of managing your retirement funds or other investments, consider a robo-advisor, which is a lower-cost alternative to a human investment manager. Here are our top picks for robo-advisors.
- If you are saving for a goal you want to accomplish in the next five years, steer clear of the stock market and consider an online savings account. Here is NerdWallet’s round-up of the best high-yield online savings accounts.
Find the Best Brokers
- See NerdWallet's objective ratings
- Read detailed reviews of each broker
- View our picks for beginner investors
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. The best of these brokers also provide research, analysis tools and educational support to get you started.
Before you open an account, 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 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 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? Make sure your broker offers them.
- Minimums: A broker’s minimum deposit requirement can range from $0 at a broker like TD Ameritrade or Ally Invest to $2,500 or more.
Try NerdWallet’s broker selection tool below to get suggestions based on your investment preferences.
Get the best broker recommendation for you by selecting your preferences
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
- 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.
Nervous about executing your first purchase? See our step-by-step guide to buying stocks.
Cash account versus margin account
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.
More on how to get started investing: