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Published 05 November 2021
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Investing for Beginners: What is a Brokerage Account?

While investing can seem very complex, opening a brokerage account and starting to invest is surprisingly easy. You can either place your own trades through an online account, or hand control over to a financial adviser and investment manager. Discover how to open a brokerage account below.

As an individual investor, a brokerage account is your portal to the stock market. The name comes from the fact you will be working with a brokerage firm, more commonly known as a stock broker, to execute your trades.

They are the middlemen who sit between you as an investor, and the shares available to buy and sell on stock exchanges.

But a brokerage account isn’t just a share dealing account. You can also buy, sell and hold bonds, ETFs, mutual funds and more. The securities on offer will depend on your broker.

To begin your investing journey, read on below, where we explain how to open a brokerage account and what to look out for when choosing your investment platform.

» MORE: What is the stock market and how does it work?

How to open a brokerage account

Although the requirements will differ between brokers, the process of opening a brokerage account is normally as simple as filling out a form on your investment platform of choice.

You will usually be required to submit the following information:

  • Proof of identification, such as a passport or driving licence (you will need to be 18 or over).
  • Personal details, such as your name, email, phone number and home address.
  • Your National Insurance number.
  • Your bank card details.

Certain brokers may also ask for further information regarding your employment status, annual income, savings and investments, and the source of your funds.

Then, all you need to do is deposit some money into your newly-opened brokerage account, and you can start investing.

And as long as you are not opening a margin trading account, which essentially allows you to borrow money from your brokerage firm to invest, opening a brokerage account will not affect your credit score.

» MORE: How to get started investing

How do brokerage accounts work?

Buying financial securities through a brokerage account is like asking someone, namely your broker, to go to the shop for you.

You are providing the funds for them to buy (or sell) whatever it is you’ve asked for. This is the buy/sell order.

Your broker is the one actually doing the buying or selling. This is the execution, or completion, of your order. It is also known as ‘filling’ an order.

And, just as someone would decide which shop to go to, your broker will decide the best way to fill your order. This could be by:

  • Placing a request with the floor of a stock exchange.
  • Trading with a market maker.
  • Filling the order digitally.
  • Using the broker’s own inventory.

This process can be instant. However, due to how fast the market moves, there may be a difference in the buy/sell price, and the eventual execution price.

Types of orders

The potential difference in buy/sell price and execution price means it is important to understand the types of orders you can place with your brokerage account, and how to ensure you get what you want, as much as possible.

The three main order types are:

Market order

A market order is when you want to buy or sell an asset at the market’s current best available price.

This means you aren’t guaranteed a specific price, but should see your order executed almost immediately.

Limit order

A limit order gives you more control over the execution price, by dictating the maximum buying price you are willing to pay, or the minimum selling price you are willing to accept. Your order will only be executed at that price or better.

However, there is no guarantee that your order will actually be executed. It is dependent on supply and demand, and your place in the order queue.

Stop orders

A stop order is where you tell your broker you want to buy or sell an asset once it moves past a specified price level.

When the stop price is reached, the stop order would then become a market order. It differs from a limit order because it is filled at the best available market price (once the price level has been reached), rather than at your specified price or better.

» MORE: Everything you need to know about buying shares

Online vs managed brokerage accounts

Another consideration when opening a brokerage account is whether you want an online account where you place all the trades yourself, or a managed account where a financial adviser makes investment decisions for you.

Online brokerage accounts

This is the do-it-yourself option, where you buy, sell and manage your own investments.

Online brokerage accounts are often held with discount brokers. This means they have low trading fees, or sometimes even commission-free trading, but don’t have extra services, such as research and financial advice.

However, you can also open an online brokerage account with a full-service broker, which may include more guidance, research and support. This will normally be more expensive than having an account with a discount broker.

Managed brokerage accounts

If you want a less hands-on approach, then a managed brokerage account could be right for you.

The financial adviser attached to your account will get to know you, your current situation, and your long-term financial goals. Then they will design a bespoke investment portfolio intended to match your needs. This portfolio will be managed by an investment manager.

Due to the expertise and activity required on behalf of the brokerage firm, managed accounts carry much higher fees and minimum investments than online accounts.

An alternative to a full-service managed brokerage account is a robo-adviser account. This is where you will submit certain investing criteria, and then be offered a series of portfolios to invest in that have been algorithmically created based on your needs. These will normally be less expensive than a full-service managed brokerage account.

How to choose your brokerage account

Before opening a brokerage account, you should research your options, and find an investment platform that meets all of your own personal requirements.

Factors to bear in mind when choosing your brokerage account include:

  • Commissions and fees: these can vary greatly from broker to broker, and may cover everything from trade fees, to service or maintenance fees, and inactivity fees.
  • Range of assets: while most accounts will allow you to trade stocks, bonds and ETFs, you should research whether a broker offers more specialised products like SPACs or options.
  • Trading platform: each trading platform will have its own tools to help you manage and monitor your investments.
  • Share trading app: if you want to trade on the go, making sure your prospective broker has a dedicated app is a must.
  • Research: if you want guidance in making your investment decisions, then you should check whether a broker offers research reports.

WARNING: We cannot tell you if any form of investing is right for you. Depending on your choice of investment your capital can be at risk and you may get back less than originally paid in.

Image source: Getty Images

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