What is a Brokerage account
A brokerage account is a taxable account that holds financial assets such as stocks, bonds, ETFs, money market funds, REITs, etc., on behalf of an investor. These assets are owned by the investor and not by the brokerage firm. The brokerage firm only acts as a custodian. The brokerage may charge some fees to provide custodial and trading services.
Types of brokerage accounts
There are two types of brokerage accounts – cash and margin. Typically, stock trades settles 2 days after the trade date. What that means is if you buy a stock today, cash needs to be made available after 2 business days. Similarly, if you sell a stock today, cash proceeds will be available after 2 business days. This is called a T+2 settlement. In a cash account, you, as an investor has to make the cash available for a purchase. In a margin account, the brokerage firm can loan you the amount with your assets as a collateral. If you are new to investing, I recommend a cash brokerage account. Using margin with incomplete knowledge may lead to a financial disaster.
You can have multiple brokerage accounts. Roth IRA and 401(k) accounts have some restrictions on the amounts that can be transferred in them. However, a regular brokerage account has no such limit. You can transfer funds in and out of the brokerage account easily. You can make an online transfer from your regular bank account or write a check to make a transfer to the brokerage account.
Brokerage accounts can be self directed or managed. Managed portfolio accounts charge an annual advisory fee on account balances. Self-directed accounts only charge fees for trading and may have some minimum balance requirements. A lot of brokerages don’t charge any commissions for trades and make money when they direct trades to market makers.
There are many discount brokerage options to choose from.
If you bank at Bank of America, be sure to check if you qualify for free trades with MerrillEdge. There are many other options available today. Be sure to read the fine print before you open a new account.