A brokerage account is your gateway to the stock market. Choosing the right broker and account type can significantly impact your trading experience, costs, and ultimately your returns. This guide covers everything you need to know about opening and managing a brokerage account.
What is a Brokerage Account?
A brokerage account is an investment account that allows you to buy and sell securities like stocks, bonds, ETFs, mutual funds, and options. Your broker acts as an intermediary between you and the financial markets, executing your trades and holding your investments.
Key concept: Unlike a bank account, money in a brokerage account is invested in securities. Your balance will fluctuate with market conditions, and investments are not FDIC insured (though SIPC insurance protects against broker failure).
Types of Brokerage Accounts
Taxable Brokerage Account
The most common and flexible account type:
- No contribution limits
- Withdraw anytime without penalties
- Capital gains and dividends are taxable
- Best for non-retirement investing and trading
Retirement Accounts (IRA)
Tax-advantaged accounts for retirement savings:
- Traditional IRA: Tax-deductible contributions, taxed on withdrawal
- Roth IRA: After-tax contributions, tax-free withdrawals
- Annual contribution limits apply
- Early withdrawal penalties before age 59.5
Margin Account
Allows borrowing money to trade:
- Leverage to buy more than your cash balance
- Required for short selling
- Interest charged on borrowed funds
- Risk of margin calls if account value drops
Cash Account
The simplest account type:
- Can only trade with deposited cash
- No borrowing or leverage
- Must wait for trades to settle before reusing funds
- Good for beginners or conservative traders
What to Look for in a Broker
Commission and Fees
- Stock/ETF trades: Most major brokers now offer commission-free trading
- Options: Per-contract fees typically range from $0.50 to $0.65
- Account fees: Watch for inactivity fees, transfer fees, wire fees
- Margin rates: Compare if you plan to use leverage
Platform and Tools
- Charting and technical analysis tools
- Stock screeners and research
- Mobile app quality
- Options analysis if trading options
- Paper trading for practice
Execution Quality
- Speed of order execution
- Price improvement on orders
- Payment for order flow practices
- Direct market access (for active traders)
Customer Service
- Phone and chat support hours
- Response times
- Quality of help received
- Educational resources
Popular Brokers Compared
Fidelity
Best for: Overall value and research
- Commission-free stocks and ETFs
- Excellent research and education
- Strong customer service
- Fractional shares available
Charles Schwab
Best for: Full-service experience
- Commission-free stocks and ETFs
- Thinkorswim platform (from TD Ameritrade merger)
- Physical branch locations
- Comprehensive banking services
Interactive Brokers
Best for: Active and professional traders
- Lowest margin rates
- Access to global markets
- Advanced trading platforms
- Professional-grade tools
How to Open a Brokerage Account
The process is straightforward and typically takes 15-30 minutes:
Step 1: Gather Information
- Social Security number
- Date of birth
- Employment information
- Bank account details for funding
- Valid government ID
Step 2: Complete Application
- Choose account type
- Answer suitability questions about investment experience
- Select margin or cash account
- Apply for options trading approval if needed
Step 3: Fund Your Account
- Link your bank account
- Transfer funds via ACH (free, takes 1-3 days)
- Wire transfer for faster funding (fee may apply)
- Transfer from another brokerage (ACATS transfer)
Step 4: Start Trading
- Explore the platform
- Set up watchlists
- Practice with paper trading if available
- Place your first trade
Account Minimums
Most online brokers have eliminated account minimums, but some requirements remain:
- Pattern Day Trading: $25,000 minimum for accounts with 4+ day trades in 5 days
- Margin accounts: Often require $2,000 minimum
- Some premium services: May have higher minimums
Important Account Features
SIPC Protection
The Securities Investor Protection Corporation protects accounts up to $500,000 ($250,000 for cash) if a broker fails. This does not protect against investment losses.
Fractional Shares
Many brokers now offer the ability to buy partial shares. This allows investing in expensive stocks like Amazon or Google with any dollar amount.
Dividend Reinvestment (DRIP)
Automatically reinvest dividends to buy more shares. A powerful tool for long-term compounding.
Tax Documents
Your broker provides essential tax forms:
- 1099-B: Reports capital gains and losses
- 1099-DIV: Reports dividend income
- 1099-INT: Reports interest income
Track Your Brokerage Performance
Pro Trader Dashboard connects to your brokerage accounts and provides powerful analytics to track your trading performance.
Summary
Choosing a brokerage account involves weighing fees, platform features, tools, and customer service against your specific needs. Most major brokers now offer commission-free stock trading, so focus on the tools and features that matter most for your trading style. Opening an account is quick and straightforward, requiring basic personal information and a funding source. Start with a cash account if you are new, and consider margin only after you understand the risks involved.
Learn more: How to Choose a Broker and Commission-Free Trading Guide.