A brokerage account is an account opened by an investor with a registered brokerage firm through which trades are placed. In a sense, it is the repository of an investor’s assets including stocks, bonds, mutual funds and more. Orders on such an account are made by the brokerage on behalf of the investor. The capital gains made on such investment are taxable.
Brokerages offer a variety of accounts to investors based on their needs. These can be full-service, discount, self-directed, cash and margin accounts. They offer varying services including extensive financial advice and borrowing of funds, among others. These services are based on the amount of support required by an investor, their level of investment, and experience.
Factors to consider before choosing the best brokerage account for you
The advent of the internet introduced online brokerage accounts to investors. Since these accounts can be operated by investors without the need for a middleman, investment became more and more self-directed. Traders started carrying out their own market research and selecting the right securities for themselves.
Online brokerage accounts have since morphed into a variety of investment products that cater to the
individual needs of investors. The best online brokerage accounts and self-directed brokerage accounts now coexist with discount and traditional accounts. Moreover, automated financial advising platforms called robo-advisors have now emerged that impart the required knowledge and make investment decisions at a small price.
Human financial advisors
On the other hand, many investors prefer human advisors to robotic ones. These are associated with rich investors who can spare the cost of such financial services along with investing their capital. Usually, the job of such advisors entails creating and maintaining the investor’s portfolio and providing allied services such as accounting and insurance.
While these services are tailored to investors’ needs, they must be worth the cost incurred. Investors must be cognisant of the independence over their investment decisions provided by such advisors and whether they are being offered the best products.
Types of brokerage accounts
Based on the above determinants, various types of brokerage accounts are available that take of the needs of investors in varying degrees.
Online self-directed accounts
These accounts largely leave investment decisions up to the investor while providing some tools of analysis and research to help guide them through the process. Tasks such as carrying out trades and building investment portfolios are left to the trader, while the account simply provides an interface.
These accounts are ideally suited for investors who are well-versed with the market, can research themselves, and build a portfolio on their own. Likewise, traders who buy and sell daily can go for such accounts and avoid paying transaction charges for each trade. On the contrary, long-term investors can afford to pay more in transaction charges since they make only a few trades every year.
For young investors just starting on their trading trajectory, robo-advisors are a good fit. These are automated tools available in the form of online platforms that advise on investments while charging a minimal fee. Young, tech-savvy people with smaller sums to invest can use these low-fee ETFs with low-cost technology to place their trades. For this reason, robo-advisors are perhaps the best brokerage accounts for beginners.
These work on algorithms that are designed to facilitate the creation of a diversified portfolio, while also keeping track of various fees and tax implications. Such platforms are different from self-directed ones in that they offer more in terms of financial advice and guidance, and are suited for those who like to invest passively. Many active traders, however, find robo-advisers to be uninteresting and lacking in sophistication. You must consider the overall cost of such an account, additional services and the reputation of the firm offering this service before buying an account.
The highlight of full-service accounts is that they provide well-rounded financial services such as advice on investment and other services, often at an exorbitant price. Firms offering full-service accounts appoint financial advisors to each investor who takes care of planning their investment and actually carrying out transactions.
These accounts may charge fees for financial advice, or may earn commissions on individual trades. The control of financial advisors on your plan and portfolio can vary. Some advisors will ask for your approval before making any transactions, while others use their sole discretion to place trades. Your ability to meet the advisory expenses and the method of payment should be considered in depth before making a decision.
Discount brokerage account
Discount accounts are the most common type of brokerage accounts. These are low-cost and can be online or in branch offices. Suited for casual investors, these accounts require the trader to do everything including planning, research, choosing the right securities and placing trades on their own.
Traders wishing to make small investments with easily usable software can opt for discount accounts. These accounts can often be opened at no cost, but are required to add a minimum opening fund. Trading occurs with little commission, or sometimes none at all.
Cash brokerage account
Discount accounts or full-service accounts can be cash brokerage accounts. These types of accounts require investors to deposit cash needed for a particular trade. In such accounts, brokerages do not lend traders any money, disallowing them to carry out some basics of trading such as shorting stocks. Perhaps the most traditional type of brokerage account, cash accounts require traders to settle purchases by a specified date.
As opposed to cash accounts, margin accounts allow traders to borrow money from their brokers at a low interest in order to make advanced trades such as shorting. The amount is often borrowed against the existing cash or securities in your account as collateral. Again, full-service or discount accounts can be margin accounts.
Margin accounts allow traders to make substantial gains, while also making room for incurring great risk. If a trader makes a poor choice by loaning money from a margin account, he or she is potentially staring at a massive debt. Unlike cash accounts, where the risk is limited to your investment amount, in margin accounts, investors stand to lose more than their initial investment.
The bottom line is that the choice of brokerage account depends entirely on the size of your investment, your experience and comfort with dealing in the stock market, and your risk-taking capability. With the changing face of the stock market and newer innovations in tech, you can choose from a large number of custom brokerage accounts available with various brokerage houses in the country today.