Discussion Topic: Brokerage Account
Have you ever heard about brokerage accounts and asked yourself "What is a brokerage account?". Then you just come to the right place. Today we are going to discuss What is a Brokerage account? how to open a Brokerage Account? Cash account vs margin brokerage account? And what type of investment you can do with it?.
This Article is relevant to Tier1 countries like USA, UK, CAN, AUS etc. If you are visiting this article from any other countries like India (or Indian subcontinent) then follow this link: How to Start Trading Stocks - All About Trading & Demat Account.
What Is a Brokerage Account?
Before knowing the detail on how to open a brokerage account, let us first look into some basic details about it.
A brokerage account is a type of taxable account used in trading stocks. You can open this type of account with a stock brokerage firm. Some big stockbrokers may allow you to buy and sell everything from stocks and mutual funds to bonds, currency, futures, and options contracts etc.
You may deposit cash into this account either by submitting a check or linking it to a savings account at your bank. Once the cash is deposited, you can use that money for many different types of investments.
In exchange of executing your buy and sell orders, they will charge you some nominal commission or brokerage fee.
Cash Account vs Margin Brokerage Account:
At the time of opening your brokerage account, you would probably be asked if you want a cash account or a margin account.
A cash brokerage account is one that requires you to deposit full cash amount in order to process the transactions and settlement. The brokerage firm will not lend you any money or provide any extra leverage for an extended time period.
A margin account allows you to lend money from the broker in order to make a trade. When you buy stocks on margin, the investments in your account serve as collateral for that loan till you pay it back. And as with any loan, you’ll have to pay interest - here also you pay that interest termed as margin rate.
[See Also: What are Leverage and Margin?]
If you’re a new investor and open a brokerage account, then my suggestion is to stick with a cash account. It is safer than that of a margin account. It is very risky to play around with margin if you are not experienced enough.
[See Also: What is a Margin Call? How to Avoid One?]
Margin accounts usually have higher minimum investment requirements (around $2,000 or more), than of a cash account (which is offered with a minimum deposit requirement as low as $0).
How to Open A Brokerage Account?
Once you’ve decided on a broker, opening a brokerage 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 countries you’ll need to be 18 to open your own account)
- You will need to initiate a deposit or funds transfer (often of a minimum amount).
Once that is complete, you can start investing.
How Many Brokerage Accounts One Can Have?
There's no limit to the number of brokerage accounts you are allowed to open. In reality, you may have as many, or as few, brokerage accounts as you like and as institutions will allow you to open.
Typically, you can open multiple brokerage accounts with different brokers for diversifying your relationships and exposures.
What Types of Investments You Can Do With a Brokerage Account:
Although not all the brokers offer all the investment options, opening a brokerage account typically enables you to invest through many channels such as:
- Common Stocks or Equity Shares: which represent ownership stakes in businesses.
- Preferred Stocks: Usually don't get a share in firm's profit but, tend to pay fixed and higher than average dividends.
- Stock Futures & Options (Stock Derivatives): This includes future contracts, call options, and put options.
- Mutual Funds: A collection of pooled investment portfolios owned by many smaller investors and managed by some reputed financial institutions.
- Exchange Traded Funds or ETFs: A special type of mutual fund, including index funds, that trade like stocks. These types of funds are managed directly by Stock Exchange Authorities.
- Bonds: Including Sovereign bonds such as U.S. Treasury bills, general bonds and notes, corporate bonds, tax-free bonds, and agency bonds.
- Money Markets and Certificates of Deposit: stand for the ownership in pools of highly liquid mutual funds.
- Real Estate Investment Trusts or REITs: This represents pools of real estate related assets including hotel REITs.
- Master Limited Partnerships or MLPs: These are highly complex partnerships (in firms) with certain tax advantages provided to certain types of investors.
Check Before You Open a Brokerage Account:
Before you open a brokerage account, you must first decide on the broker. To do that, we recommend you to at-least compare on the below points before deciding:
Account Opening Charges: This is the fee charged at the time of opening a brokerage account.
Account Maintenance Charges: This is an annual fee levied to maintain brokerage account.
Commission or Brokerage Charges: Almost all online brokers will charge a trade commission, typically $5 to $10 per trade. A broker’s commission will apply to trades of stocks, futures, options and ETF's. They may also charge you a transaction fee for buying mutual funds.
Charges for High or Low-Frequency Trading: If you have plans to trade frequently, then find a broker with low commissions. If you have plans to trade occasionally, make sure that the broker doesn’t charge inactivity fees.
Trading Platform: Consider checking the software/ technology provided by the stock broker for online trading. Also, check if the stockbroker has a good service standard for the call-to-trade facility (for placing orders over the phone).
See our detailed guide on how to choose the best stock broker.
We hope that you have enjoyed the above article on how to open a brokerage account. Be with us to explore forex trading, stocks trading, and other money-making opportunities.
Leave us some comments if you have any questions or doubts about the brokerage account, margin account vs cash account, or any other concern, we will be happy to help you. Also, let us know about the service quality you are experiencing with your broker.