How and Where to Open a Brokerage Account

What is a brokerage account?

A brokerage account is a type of investment account opened with a brokerage firm. You can deposit money into the account, and the brokerage firm will execute investment orders at your request.

Many investors use brokerage accounts to purchase investments such as stocks, bonds, mutual funds or exchange-traded funds online. Brokerage accounts are also used to hold those investments once purchased, allowing investors to track the value of their portfolio over time.

A brokerage account doesn't have limits on how much you can contribute or what you can do with the money. In exchange for this flexibility, you won't get the tax benefits found in other investment accounts, such as retirement accounts.

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How to open a brokerage account

Once you select a broker, you can typically open an account with the firm in under 15 minutes. During the application process, you'll need to provide your name, address, Social Security number, an ID, and other types of personal information to prove that you are who you say you are. In most states, you must be 18 to open your account, but parents can set up a brokerage account for their kids.

There should be no fee to open a brokerage account, and many brokerage firms don't require an upfront deposit. Once you've opened the account, you will, however, need to link a bank account in order to fund it later when you're ready to purchase investments. You can move money into the account from your checking or savings account or another brokerage account.

Some brokers make you verify a transaction before you can begin purchasing investments. If that’s the case, you’ll have to wait until the broker deposits a small sum in your bank account — typically a few cents. Then, you’ll confirm the transaction by telling the brokerage the amount deposited. The broker can walk you through the process if you have any questions. After the transfer is complete and your brokerage account is funded, you can start investing.

Remember, any money you transfer or investments you purchase in the brokerage account are yours, and you are free to sell your investments anytime. The broker merely holds your account and acts as a middle party between you and the investments you want to buy. Depending on your goals, you can also choose to open more than one brokerage account, and there's no limit on the amount of money you can put into a taxable brokerage account each year.

» Ready to get started? View our picks for the best brokers for beginners

Where to open a brokerage account

Generally speaking, you have two main options for where to open a brokerage account: Online brokers and robo-advisors. The type of brokerage account provider you choose largely depends on whether you want to manage your own investments or gain access to help.

Online brokerage account

If you want to purchase and manage your investments, an online brokerage account is for you. An account with an online brokerage company enables you to buy and sell investments through the broker’s website. Discount brokers offer a range of investments, including stocks, mutual funds and bonds.

» View our picks for the best online brokerage accounts

Managed brokerage account

A managed brokerage account comes with investment management from a human investment advisor or a robo-advisor. A robo-advisor provides a low-cost alternative to hiring a human investment manager. These companies use computer programs to choose and manage your investments based on your goals and timeline. Robo-advisors may be a good fit if you want to be hands-off about your investments.

» View our picks for the best robo-advisors

How to invest with a brokerage account

Once you've opened and funded your account, you might be wondering how to ... well, actually invest. Which investments you choose or how you build out your portfolio will depend on the type of account you opened, your risk tolerance, your timeline and your investing goals.

Online brokerage account: If you've opened a traditional brokerage account that requires you to manage and select your own investments, a good place to start is learning about key concepts that guide investment strategy, such as diversification, asset allocation, and all the different types of assets available on the market. Beginner investors may aim to start with the creation of a balanced portfolio comprised of a mix of stocks, bonds, funds, and other types of assets. The exact ratio of each asset will depend on your timeline and tolerance for risk. If you need some more help getting started, check out our guide on how to start investing.

Robo-advisors: Since robo-advisors take the work out of hand-selecting investments, you can generally expect the provider to ask you some questions about your investment timeline and risk tolerance first. After you input your preferences, the advisor will offer a selection of predesigned portfolios (which can range from risk-averse to aggressive) for you to choose from. While these portfolios are also managed automatically by the broker, you can make adjustments or change your preferences as you go. Another plus? Some providers also offer automatic rebalancing and tax optimization.

How taxes work with a brokerage account

The act of opening a brokerage account doesn’t mean you’ll be on the hook for additional taxes. However, investment income within a brokerage account — for example, the profits from selling your investments — is subject to capital gains taxes. This is why brokerage accounts are also called “taxable accounts.”

Generally, you only pay capital gains taxes when you've earned income on your investments — so while taxes are viewed as a "bad" thing and savvy investors try to minimize them, they're a signal that your investments are earning a return. Here's a general overview of common tax scenarios you can encounter when selling investments.

• Short-term vs. long-term capital gains tax rates: If you buy stock through a brokerage account, you’ll probably have to pay capital gains tax if you sell it for a profit later. How much tax you pay depends on how long you owned the stock before selling it. If you sell a year or less after buying, you may have to pay short-term capital gains tax, which is usually your ordinary income tax rate (10% to 37%). This is often higher than the long-term capital gains rate (0% to 15%) for stocks that are held for longer than a year before sale.

• Tax-loss harvesting and capital loss deductions: If you sell an investment for a loss, you can use that loss to offset some of your gains and reduce your capital gains tax burden. If your overall losses are more than your gains, you could also deduct up to $3,000 of those losses from your regular income on your tax return.

• Dividends: If the stock or fund you buy through a brokerage account pays dividends, you’ll have to pay taxes even if you choose to reinvest them. If this is the case, your brokerage will send you a DIV-1099 tax form to include in your tax return.

While brokerage accounts don't offer the same tax benefits you might get with a retirement account, that doesn't mean brokerage accounts are "non-tax advantaged,” according to Delyanne Barros, founder of Delyanne The Money Coach.

"The benefit of the brokerage account is leveraging the long-term capital gains tax," she said in an email interview. "In order to do that, you must be a long-term investor. That means you have to hold your investments for over a year. Not only will this help you capture the most favorable tax bracket, but it will likely result in better returns."

The key to achieving this? Stay invested, ignore the day-to-day stock market noise and go live your life, said Barros.

What is the difference between a brokerage account and a retirement account?

There are very few rules for brokerage accounts. You can pull your money out anytime, for any reason, and invest as much as you’d like. That differs from the most popular retirement accounts:

• IRAs: In an IRA, you earn tax benefits for contributing. Depending on the type of IRA, that means you'll get either a tax deduction on contributions in the year you make them (traditional IRA) or your money will grow tax-free and you can take distributions in retirement without paying income taxes (Roth IRA).

• 401(k): A 401(k) is a retirement account offered through an employer. If you have one, you are already investing for retirement through that account, and your employer may offer matching contributions. Generally speaking, you'll want to invest enough in a 401(k) to earn the full available match before you contribute to an IRA or taxable brokerage account.

Wendy Moyers, a certified financial planner at Chevy Chase Trust in Bethesda, Maryland, says the ideal situation is to have both a taxable brokerage account and an IRA or 401(k), but it can depend on your goals.

"If you want to save money to buy a house, a brokerage account would be more appropriate," Moyers says. If you want to invest for retirement, consider opening a retirement account rather than a taxable brokerage account.