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Brokerage account is a financial term you should understand. Here’s what it means.
What is a brokerage account?
A brokerage account is an account in the name of an investor, held by a securities firm or brokerage. The account is used to buy investments such as stocks, bonds, mutual funds and real estate investment trusts (REIT). The account is funded by the investor.
The purpose of a brokerage account is to allow you to buy securities and investments through your broker. The account is held by the broker, in your name, and contains your money, which you use to buy securities and other investments. To trade, you need to deposit sufficient funds into your brokerage account. Usually, the brokerage requires that you deposit cash, although some firms accept credit cards.
The underlying principle behind a brokerage account is that you should always have sufficient funds available in the account to pay for trades and associated commissions. Some brokerage firms require a minimum deposit. Proceeds from the sale of investments as well as dividends and interest are paid into the account and can be transferred to the investor’s private account.
Before you open a brokerage account, you need to select a brokerage. There are three kinds of brokerage firms:
- A full-service brokerage provides comprehensive investment advice and an account executive who personally handles your portfolio. This is the most expensive option.
- A discount brokerage executes your trades, but does not offer investment advice. Fees are much lower.
- An online brokerage is where you place orders to buy or sell electronically. This is a common option for new investors, and fees are generally low.
Along with the services offered, you should research the fees that brokerages charge related to how you plan to trade. Essentially, there are two methods of investing:
- Trading, where you seek to earn money by benefiting from short-term price fluctuations. With this form of investing, you make numerous trades but need to be careful because it’s easier to lose money. Trading is not for beginners.
- Passive investing, where you carefully research stocks and buy with the intention of holding them for a time, usually a number of years. Passive investing requires patience, but it’s the safest way to grow capital.
A brokerage account is used to invest in different securities, including:
- Stocks in public companies.
- Sovereign bonds issued by treasury and government agencies.
- Corporate bonds.
- Mutual funds.
- Exchange-traded funds (ETF).
- Stock options and derivatives.
Brokerage account examples
If you are new to investing in stock markets and other securities, a good way to start is to register with an online brokerage. Before you invest, take time to understand the differences between the various forms of investments and the risks associated with these investments. Bonds, mutual funds, ETFs, and stocks are safer than derivatives. If possible, attend an online investing course. Remember that there is always a risk associated with investments in securities. Use money you don’t currently need.
Once you have decided your strategy, select a brokerage that suits your planned approach.
Register and open your account by depositing the required minimum amount. When you are ready to trade, ensure that you have sufficient funds to cover the trade. When trading stocks, you specify the price you are prepared to pay for the stock, the number of shares you intend to buy, and the period your trade remains open. If the conditions you have specified are met, the trade will take place.
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