What Is a Brokerage Account? Types, How to Open One, and What You Can Hold

What Is a Brokerage Account?

A brokerage account is a financial account you open with a licensed brokerage firm that allows you to buy and sell investment securities including stocks, bonds, ETFs, mutual funds, options, and other financial instruments. Unlike a bank account, a brokerage account is designed for investing, not daily transactions. Most major brokerages today—Fidelity, Charles Schwab, Vanguard, TD Ameritrade (now merged with Schwab), and E*TRADE (now part of Morgan Stanley)—offer online accounts with no trading commissions for stocks and ETFs.

Brokerage accounts are protected by SIPC (Securities Investor Protection Corporation), which covers up to $500,000 in securities and $250,000 in cash per account if the brokerage firm fails. Note that SIPC does not protect against investment losses—only against the failure of the brokerage itself.

Taxable vs. Tax-Advantaged Accounts

The most fundamental distinction in brokerage accounts is whether they offer tax advantages:

• Taxable brokerage accounts: Standard investment accounts with no special tax status. You pay taxes on dividends and interest in the year received, and capital gains taxes when you sell securities at a profit. There are no contribution limits and no restrictions on withdrawals. The flexibility is the primary advantage.
• Tax-advantaged accounts: Retirement-focused accounts with special IRS rules. Traditional IRAs and 401(k)s defer taxes until withdrawal. Roth IRAs and Roth 401(k)s use after-tax contributions but grow and can be withdrawn tax-free. These accounts have annual contribution limits set by the IRS.

The optimal strategy is to max out tax-advantaged accounts first (401k match, IRA, HSA), then use taxable brokerage accounts for additional investing. In taxable accounts, holding tax-efficient investments like index ETFs, which generate minimal taxable distributions, minimizes annual tax drag.

Margin Accounts vs. Cash Accounts

Within taxable brokerage accounts, you can choose between cash accounts and margin accounts:

• Cash accounts: You can only invest money you actually have on deposit. Purchases must be fully funded by settled cash. Simpler and carries no risk of margin calls.
• Margin accounts: Allow you to borrow money from the broker to buy additional securities, using your existing holdings as collateral. Margin amplifies both gains and losses. If the value of your holdings falls below the broker's maintenance margin requirement (typically 25–30%), you receive a margin call demanding immediate deposit of additional funds or forced sale of holdings at an inopportune time.

Margin is a powerful tool for experienced investors but dangerous for beginners. Interest rates on margin loans range from 5–12% depending on the broker and loan size. Margin is most prudent for short-term cash management needs rather than leveraged long-term investing.

How to Open a Brokerage Account

Opening a brokerage account is now a simple online process that takes 15–30 minutes. The basic steps are:

1. Choose a broker: Consider commission structure (most charge $0 for stocks and ETFs), available investment types, research tools, educational resources, and minimum balance requirements. Fidelity and Schwab are widely regarded as the best all-around brokers for most investors.
2. Complete the application: Provide your Social Security number, employment information, financial information (income, net worth, investment experience), and bank account details for funding. Brokers are required to verify your identity under anti-money laundering regulations.
3. Fund the account: Transfer funds from your bank via ACH (1–3 business days), wire transfer (same day, usually a fee), or check. Many brokers have no minimum deposit requirement.
4. Start investing: Research investments, place your first order, and set up automatic recurring investments if desired.

What Can You Hold in a Brokerage Account?

A full-service brokerage account can hold a wide range of investments:

• Stocks: Shares of individual publicly traded companies on US and international exchanges.
• ETFs: Exchange-traded funds tracking indexes, sectors, commodities, or other strategies.
• Mutual funds: Pooled funds priced at end of day. Available from the broker's preferred fund family or outside families (sometimes with transaction fees).
• Bonds: Treasury bonds, corporate bonds, and municipal bonds can be purchased through most brokerages.
• Options: Contracts giving the right (but not obligation) to buy or sell securities at a specified price. Require approval based on experience level.
• REITs: Real estate investment trusts trade like stocks and can be held in brokerage accounts.
• Cash equivalents: Money market funds, Treasury bills, and CDs can be held as the cash component of a brokerage portfolio.

Choosing the Right Broker

For most investors, the primary considerations are: zero commissions on stock and ETF trades, a large selection of no-transaction-fee mutual funds, good research and educational tools, and a user-friendly interface. Fidelity, Schwab, and Vanguard meet these criteria for long-term investors. For active traders, platforms like Interactive Brokers may offer better tools and margin rates. Robo-advisors like Betterment and Wealthfront are excellent for investors who prefer a fully automated, hands-off approach to portfolio management.