A brokerage account is a financial tool that allows you to invest in stocks, bonds, exchange-traded funds, options and mutual funds. If you’re new to the world of investing, understanding brokerage accounts is one way to begin building a portfolio. Alternatively, new investors can turn to investment professionals and invest in actively-managed strategies -- with or without knowledge of the workings of brokerage accounts.
What is a brokerage account?
A brokerage account is typically used to invest money in financial securities. Unless these assets are held in a tax-deferred account, they are subject to tax, which means that money made in these accounts is taxed as capital gains. While income taxes apply to money earned from employment, dividends, royalties, or interest, capital gains taxes are imposed on profits from trading assets. If you’re confused, consulting with a financial advisor is a good idea. Titan does not offer tax advice.
How does a brokerage account work?
When you open a brokerage account, you’re making an agreement with a registered brokerage firm. Money can be deposited or withdrawn at will, though at times the money is taxable. When you turn over money to your broker, that money can then be invested in securities. How it’s invested depends on the type of account.
3 Types of brokerage accounts
Think of it like choosing a vehicle to get you to a destination. The vehicle needs an operator—it could be you, a hired driver, or a robot.
- Fly solo with an online brokerage account. Online brokerage accounts are self-directed and these days often don’t charge commissions on trades. You decide which securities you want to invest in and when, perhaps based on market trends and your belief in the potential of the investment to increase in value.
- Get a driver with a full-service broker. If you don’t want to pick your own stocks or manage your portfolio, you can hire a broker to steer your investments. The arrangement tends to come with higher fees, both for transactions and managing your account. Still, brokers are professionals with valuable experience with the potential to build wealth for their clients.
- Go on autopilot with a robo-advisor. Like self-driving cars, robo-advisors offer investment advice using technology. These digital advisors don’t answer the phone or work in a physical office—rather, they’re algorithms that invest your money into a diversified portfolio based on your risk tolerance and time horizon. These products tend to charge small fees based on the size of your portfolio, and you can override your robo-advisor’s investment decisions.
Whichever ride you choose, your destination remains the same: investment in securities tied to the market.
How commissions work
Depending on the type of brokerage account, you may be required to pay commissions. A full-service broker makes trades on securities based on how the markets are moving and consults you on those decisions. In this arrangement, you may pay a commission of 1% to 2% per trade, for example. The broker trades on your behalf, but the assets belong to you.
Discount brokers may charge a flat fee of about $5 to $30 per trade, for example, and tend to be less expensive overall. Online brokers, whether self-directed or robo-advisors, frequently charge no commission, but may require custodial fees.
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