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A brokerage account is a ticket to investing, whether you’re chasing meme stocks or building a long-term nest egg. In this article, the MarketWatch Guides team covers what you need to know to get started.
How a Brokerage Account Works
A brokerage account is a financial account at a licensed brokerage firm. You can transfer money to your brokerage account to buy and sell investments such as stocks, bonds, exchange-traded funds and mutual funds. After you deposit money in your account, the brokerage will execute trades on your behalf, often for a fee.
Choosing Investments
Brokerages have different models of helping you choose the best investments. Full-service brokers, such as Charles Schwab, Morgan Stanley and Merrill Edge, will have a human broker make recommendations about which investments to buy and when to trade them. These brokerages, which provide actively managed strategies, tend to charge higher fees — 0.35% to 0.85% of the assets under management — or flat monthly fees.
Some discount brokerages, such as Robinhood and Interactive Brokers, offer self-managed funds where you can choose your own investments, often for a small fee or no fee at all. Many brokerages also offer robo-advisers that choose investments for you based on algorithms. Robo-adviser brokerages tend to charge moderate fees of 0.02% to 0.25%.
Types of Brokerage Accounts
There are two main ways you can buy and sell through a brokerage account: a cash account or a margin account.
Cash Accounts
Cash accounts are brokerage accounts where you buy and sell investments using only the money you deposit in your settlement fund. No borrowing or margin trading is allowed — you must pay the full amount for any investments at the time of trade. With a cash account, your trading is generally limited to straightforward purchases of stocks, bonds and other securities.
Margin Accounts
Margin accounts allow you to buy and sell investments using borrowed money. Your broker lends you funds — generally up to 50% of the purchase price of the security you’re buying — that you can use to increase your investment. You’ll need to pay the brokerage loan back with interest.
With margin trading, you’re able to trade more complex investments, such as options, which are contracts to buy or sell securities at a certain price, and futures, which are obligations to buy or sell an investment at a predetermined price at a future time. However, margin trading brings much greater risk than cash trading because your losses can exceed your initial investment.
Benefits of Brokerage Accounts
Brokerage accounts offer many benefits for long-term wealth building, such as flexibility, control and ease. Since these accounts are taxable, there aren’t any limits to how much you can contribute or when you can buy and sell investments. You can control how much, when and what you invest in. If you buy passive investments such as index funds, you won’t need to spend a lot of time managing your portfolio. Many investors find success by tracking the S&P 500 or choosing to monitor the Dow Jones for long-term investment strategies.
Access to a Wide Range of Investments
One benefit of brokerage firms is the large number of investments they usually offer. You can typically invest in individual stocks, ETFs, mutual funds, index funds, bonds, precious metals, commodities, cryptocurrencies and more, all from one account. Before making trades, many investors check premarket activity to gauge market sentiment and identify potential opportunities.
Liquidity and Flexibility
Another benefit of a brokerage account is the flexibility you have in selling your funds if you need to access your money. If you’re thinking about retiring early, you’ll need investments you can tap into before you’re old enough to qualify for Social Security benefits or withdraw money from tax-advantaged retirement accounts.
While you’ll generally pay a 10% penalty if you withdraw money from a retirement account before age 59 1/2, there’s no penalty for withdrawing money from a taxable brokerage account, although you will be taxed on any gains.
“The downside [of a brokerage account] is you’ll pay taxes annually on dividends, interest and capital gains. The upside is no early withdrawal penalties and full access to your funds. It’s a tradeoff between flexibility and tax efficiency at the end of the day.”
Ability To Build Wealth Over Time
Brokerage accounts allow you to compound your wealth over time in a way that savings accounts and certificates of deposit usually can’t.
“A brokerage account is like a savings account, but better,” said Jacqueline Schadeck, a certified financial planner and host of “My Money Mentors.” “Unlike a savings account, it lets you buy stocks, bonds and funds — giving your money a better opportunity to grow over time.”
Because you could earn higher rates of return with investments in a brokerage account, your money can grow much faster than it could in a standard bank account. If you invest regularly and stay in the market for many years, your money might double multiple times — although no investment is guaranteed, and it’s possible to lose money over time. Popular investment choices include S&P 500 ETF options and tracking Nasdaq performance for technology-focused portfolios.
Financial Protection
Most brokerage firms provide limited financial protection through the Securities Investor Protection Corp. The SIPC is a nonprofit membership corporation that offers up to $500,000 per customer (including up to $250,000 for cash held in their account) if their brokerage firm goes out of business. This coverage applies to U.S. citizens and noncitizens alike as long as your money is in a SIPC-member brokerage account. However, it won’t protect you from your investments losing money.
Risks and Considerations of Brokerage Accounts
Brokerage investments are inherently risky because of changes in the market, though there are other major risks and considerations:
Market Risk
Market risk refers to the inherent uncertainty of investing in the stock market, as well as possible changes in economic factors such as inflation, interest rates, fiscal deficits and geopolitical events that affect market performance. Market risk is why your investments can gain or lose value. Experienced traders often monitor after-hours trading activity to understand how market sentiment shifts outside regular trading hours.
Margin Risk
Margin trading is much riskier than cash trading. The risks of trading on margin include:
- Being indebted to your broker since you’re trading with borrowed money
- High interest charges that you may not make up for with market gains
- Margin calls, which require you to deposit money to cover the shortfall if your investments drop below a broker’s margin requirements
Before trading on margin, make sure you have enough cash to cover any potential losses.
Overtrading or Speculation
Overtrading — also known as excessive trading — refers to buying and selling assets multiple times in a day or week without a clear reason for doing so. Speculative trading involves buying and selling in an attempt to get high returns within a short time, often with a significant amount of risk. These practices can cost you in fees, tax bills and lower returns. Sometimes, investors can get caught up in the emotions or excitement of trading and ignore best practices, such as investing for the long term.
Fees and Costs To Know About
Brokerage fees have dropped dramatically over the last two decades, but some brokerage firms still charge commissions, especially if you have a financial adviser helping you manage your investments. Here are some of the fees and costs that can eat into your investment returns.
Commissions and Trading Fees
Some brokerages aren’t always up-front about what they charge, making it hard to know what you’re really paying. Over time, even small fees and commissions can eat away at your returns. For example, a 1% fee on $100,000 can cost you about $28,000 over 20 years, according to the Securities and Exchange Commission. That’s why low-cost options such as index funds and ETFs are so popular — they offer broad diversification with minimal oversight and generally low fees.
Account Maintenance or Inactivity Fees
Some brokerages charge fees if you don’t meet a specified level of trading activity (such as not having any trades in six months or a year). These fees are normally charged monthly and can range from $4 to $25. Many brokerages don’t charge inactivity fees, but for those that do, these costs can cut into your returns. If you aren’t sure you’ll make trades regularly, find a brokerage that doesn’t charge inactivity fees.
Taxes
Since brokerage accounts are taxable, you’ll be taxed on any gains your investments make if you sell. For example, if you buy stock A for $100 and sell it for $200, you’ll be taxed on the $100 gain. How much you’re taxed depends on several factors, such as:
If you sell an investment you’ve held for less than a year, you’ll be taxed at your ordinary income tax rate. That means if you’re in the 24% tax bracket, you could pay up to $24 in federal taxes on your $100 gain.
If you sell an investment you’ve held for a year or less, you’ll be taxed at the federal capital gains rate, which is 0%, 15% or 20%, depending on your income and filing status. There are some special cases where you may be taxed at a different capital gains rate, so check the IRS rules for more information.
Many investors engage in tax loss harvesting, a practice of selling investments that have decreased in value to reduce the amount of taxes they’ll owe. To harvest tax losses, you typically sell an investment at a loss and then immediately buy a different investment so your money is still in the market. However, you don’t have to buy a new investment if you already have money in the market with capital gains. If your capital losses for the year exceed your capital gains, you can subtract up to $3,000 of that loss from ordinary income, such as wages or salary.
Other Hidden Costs
There are a few other costs that can quietly cut into your returns. One is the bid-ask spread, which is the difference between the price someone is willing to pay for an asset (the bid) and the price someone wants to sell it for (the ask). This small gap can cost you money, especially with less-traded investments. If you trade on margin, you’ll also pay interest on any borrowed funds, which adds up the longer you hold the investment.
Finally, if you invest in mutual funds or ETFs, check the expense ratio, which is the yearly fee that covers fund management. While small percentages may seem minor, they can add up over time. For example, there’s a $10,000 difference between a 0.25% fee and a 0.5% fee for a $100,000 portfolio over 20 years, according to the SEC.
How To Open a Brokerage Account
Opening a brokerage account online is fairly straightforward. The hardest part will likely be choosing your brokerage firm. After that, you’ll enter personal data and then fund your account, which can take a few days.
1. Choose a Brokerage Firm
There are a lot of factors to consider when choosing a brokerage firm, such as:
- How much help you need investing
- Types of fees you’re willing to pay
- Types of investments the brokerage offers
- How easy the investment platform is to use
- Types of educational tools the brokerage offers
Once you’ve picked a brokerage, most accounts can be opened online.
2. Complete the Application
For the application, choose whether you’d like an individual or joint brokerage account. If you choose a joint account, you’ll share the investments with the other account holder, while each of you will have your own username and password.
You’ll enter personal data, including your name, address and Social Security number. The brokerage will also ask about your employment status, financial background and risk tolerance. You may be given the option to open a self-directed account (where you choose your investments yourself), use a financial professional to make investment decisions or use a robo-adviser.
3. Fund Your Account
After you’ve opened your account, you’ll need to fund it by linking a bank account and transferring money. Your brokerage may use a third-party bank-verification system, such as Plaid, which can allow you to immediately transfer money. Or, it may deposit two small amounts in your bank account and have you verify those amounts, which generally takes two or three business days. Some brokerages require a minimum initial investment to fund your account.
The listings that appear are from companies from which this website may receive compensation, which may impact how, where and in what order products appear. Not all companies, products or offers were reviewed in connection with this listing.
Brokerage Accounts vs. Retirement Accounts
While many brokerages offer both taxable and retirement accounts, such as individual retirement accounts, brokerage accounts are typically taxable. This means that while you may have both a brokerage account and an IRA with the same broker, your brokerage account will be subject to slightly different rules and regulations.
Contributions
Taxable brokerage accounts don’t have contribution limits, so you’re able to contribute as much as you’d like in any given year. Compare that to, for example, an IRA, you can contribute $7,000 in 2025 ($8,000 for those 50 or older), subject to income and workplace retirement offerings.
Withdrawals
There are no limits on when or how much you can withdraw from your taxable brokerage account. With IRAs, you generally can’t make penalty-free withdrawals until age 59 1/2.
“While it is true that investing in a brokerage account is less favorable than a retirement account from a tax standpoint, you have complete flexibility to withdraw money from the account whenever you need to,” Lisa Whitley, an accredited financial counselor and the founder of MoneybyLisa.com, told MarketWatch Guides.
Taxes
You must pay taxes on any investment gains in a taxable brokerage account. How much you’ll pay depends on your federal income tax bracket and how long you’ve held the investment. For traditional IRAs, any contributions you make aren’t taxed, but your withdrawals are taxed at your ordinary income rate. For Roth IRAs, contributions are made with after-tax dollars, but your withdrawals are tax-free.
It can be helpful for retirement savers to have money in both tax-deferred, tax-free accounts, such as Roth IRAs, and taxable accounts, such as brokerage accounts, so they are taxed in different ways when money is withdrawn.
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FAQ: What Is a Brokerage Account?
No, you generally don’t need a lot of money to open a brokerage account. Most brokerage accounts don’t have minimum investment amounts for self-directed trading. However, to buy and sell investments, you’ll need to deposit money in your account.
Yes, you can lose the money you invest with a brokerage account since your securities can lose value and returns aren’t guaranteed.
No, a brokerage account isn’t the same as a retirement account. A brokerage account usually refers to a taxable investment account, and it doesn’t have limits on how much you can invest. A retirement account is designed to help you save for retirement and offers tax advantages, but it also has rules on how much you can contribute each year and when you can withdraw money. Brokerage firms often offer both brokerage and retirement accounts.
*Data accurate at time of publication
*The content provided in this article is for informational purposes only and should not be construed as financial, investment or tax advice. You should consult a licensed financial adviser or tax professional before making any investment decisions. All investments carry risks, including the possible loss of principal. Past performance is not indicative of future results.
