Brokerage Accounts: What They Are and Why You Need One

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I’m often asked “How do I start investing?” While there is so much to know about different types of investments and strategies, I’ve found that the issue holding most people back isn’t not knowing what to invest in.

It’s how to literally start. The process of opening an investment account, also known as a brokerage account, can feel daunting. Where do I go? How do I choose? Why do they need so much information?

What is a Brokerage Account

A brokerage account is simply an investment account. This is the account you need to open if you want to start buying stocks, bonds, mutual funds or any type of investment security.  A brokerage account is just another account to keep in your financial toolkit; you probably already have a checking and savings account, so think of a brokerage account as another to add to the list.

Brokerage accounts can be opened with a licensed investment firm, such as Fidelity or Vanguard to name a few. Once you have opened yours, you can deposit money into the account and use it to buy and sell investments, also called placing trades. That’s really all there is to it; as an investor, you are in charge of your brokerage account and you own all of the securities within it. 

How Can You Open One

You can open a brokerage account through any licensed brokerage firm, either online or in person. There are a variety to choose from and they range in price. Some brokers have more services or investment options and charge a higher fee, while others are online and offer discount investments. There are literally so many out there, so you will definitely be able to find the right one for you.

A few examples would include Fidelity (what I use), Vanguard, Merrill Edge, E*trade, Charles Schwab, Ally, Robinhood, and Stash (I also use Stash). While these are just a few of many, they are likely the brokers you’ve heard of before and are a good place to start your research. When deciding on the right broker, think about the variety of investments offered, the price of different investments, and the services that the brokers provide. 

To physically open one, you can likely do so online. You’ll simply need to create an account, link your checking account to it, and deposit some money to get started. From there, you can begin choosing the type of investment you’d like to buy and start placing trades! How fancy 🙂

How a Brokerage Account is Different than a Retirement Account

It’s pretty common to confuse a simple brokerage account with a  retirement account, but they do have a major difference that is important to note. The biggest difference is tax; with a brokerage account, you get no tax advantages. This means your investment earnings will be taxed. On the plus side, you have full control over your money and can take it out at any time, as well as invest as much as you’d like. 

On the other hand, a retirement account is tax-advantaged, meaning that you get some degree of tax break by contributing your money to it. This is specifically designed for retirement savings, so if you are looking to invest for retirement it’s important to open a retirement account. This tax advantage is demonstrated based on the type of account you have; with a Traditional retirement account, it’s taxed when you withdraw, and with a Roth, it’s taxed before you contribute any money to it. Because you are given tax advantages with a retirement account, there are limits on how much you can contribute annually, and when you can withdraw the money without penalty.

In Closing

If you’re nervous about investing, you’re not alone. It can feel daunting, especially when you’re getting started. Keep in mind that while investing can feel scary and intimidating, it is a critical piece to the personal finance puzzle and can help your money grow tenfold compared to sitting in a savings account.

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