Estimate Time9 min

What is a brokerage account?

Key takeaways

  • Brokerage accounts are a type of investment account, where you can buy a wide range of investments, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs).
  • You can open a brokerage account through an online or traditional brokerage firm.
  • A primary difference between a brokerage account and other investment accounts, such as retirement accounts, is how each is taxed and if contributions are limited.

If you're interested in investing or trading, you could consider opening a brokerage account. Here's what to know before you do.

Fidelity Smart Money

Feed your brain. Fund your future.

What is a brokerage account?

A brokerage account is an investment account that allows you to buy investments like stocks, bonds, mutual funds, and exchange-traded funds (ETFs).

Many people have other investment accounts, such as a 401(k) through an employer, an IRA (traditional or Roth), or a health savings account (HSA). These types of accounts often come with rules about who can open the account, what the money can be used for, and when you can withdraw that money penalty-free.

Regardless of your investing experience, you could consider opening a brokerage account if you are looking to invest or tactically trade the market, and perhaps as part of a larger strategy for retirement or health care planning.

Benefits of a brokerage account

Similar to other investing accounts, a brokerage account enables investing in stocks and other investments that have the potential to increase in value over time. Brokerage accounts also offer these additional features that could make them an attractive part of your overall investing portfolio.

Wide range of investments

Even if you already have an investment account, you may still consider a brokerage account for its broad access to investment types and orders.

No contribution limits

The IRS or your state sets annual contribution limits for other types of investing accounts, including IRAs, 401(k) plans, HSAs, and 529 plans. Brokerage accounts don't have a maximum.

No early withdrawal penalties

Generally, if you take out money from retirement accounts before you reach a certain age or before you've had the account for a certain amount of time, you will be dinged with early withdrawal fees. With a brokerage account, any money you contribute or earn is yours to withdraw at any time. Just know that any earnings, or gains from selling investments you bought at a lower price, usually will be taxed.

No income restrictions

Your ability to contribute to one popular type of retirement account, a Roth IRA, is based on your income. There are no income requirements to open and fund a brokerage account—though some brokerages require a minimum investment to open one.

In addition, some types of investments purchased within a brokerage account may require a minimum investment to own. While most brokerages require owners to be 18, some allow you to invest if you are as young as 13. Make sure you understand the rules governing accounts geared to teens and tied to parents/guardians, for example, around access that parents/guardians will have.

Potential tax strategies, like tax-loss harvesting and long-term capital gains tax rates

Brokerage accounts may not come with the same tax advantages for contributions and withdrawals as other types of investment accounts, but they still present opportunities to implement tax-aware strategies.

First, because you must report to the IRS any realized gains and losses annually in your brokerage account, you may be able to deduct realized losses to reduce your tax bill through what's known as tax-loss harvesting. You can tax-loss harvest in a brokerage account to offset realized gains and a small amount of ordinary income, which demonstrates how such accounts can be complementary.

Another potential tax benefit: The tax rate you may pay on any profits you earn from selling investments (called capital gains taxes) are lower for investments held longer than 1 year. These "long-term capital gains" are taxed at a rate below your federal income tax rate, or at 0%, 15%, or 20%, depending on your income and filing status. Anything held less than a year would be considered short-term gains, and those are taxed at your federal income tax rate, which, if you make over $42,000 as a single filer, is 22% or more. For dependent children under age 18, unearned income (which capital gains are) between $1,250 and $2,500 is taxed at the child's tax rate, and anything above $2,500 is taxed at the parent's or guardian's tax rate.

Considerations before opening a brokerage account

Keep in mind these brokerage account facts that differentiate them from other types of investment accounts you may own.

No tax advantages for contributions or eligible withdrawals

Unlike 401(k)s, some IRAs, and HSAs, you generally cannot deduct your contributions to a brokerage account from your taxable income each year. And earnings don't have the potential for tax-free or tax-deferred growth. You typically owe taxes on any dividends (payments that publicly traded companies may distribute to shareholders based on the companies' earnings), interest (any cash held in the account that isn't invested), and realized gains.

No company match

Some employers offer a match to certain investing accounts—which is like free money for the account owner—based on things like your contributions to a work-sponsored retirement plan. Employers might even offer direct contributions to other types of accounts (such as HSAs) without requiring a contribution on the employee's part. With a brokerage, all contributions are made by the owner of the account.

There's some inherent risk

If a bank account is held at an FDIC (Federal Deposit Insurance Corporation)-insured bank, deposits are covered up to $250,000. For brokerage accounts, there is SIPC (Securities Investor Protection Corporation) coverage, which covers up to $500,000 in securities (including a $250,000 limit on cash not in investments) in a brokerage account. However, there is no shield against individual investments losing value. (This is the case with other investment accounts, too.) Diversification—having different kinds of investments (stocks, bonds, and more) and even investing in different kinds of stocks—could help manage risk. It's essentially not putting all your eggs in one basket in case that investment type loses value; your other investments might gain value to balance things out.

How to open a brokerage account—and use it

You can open a brokerage account in a few minutes at a brick-and-mortar or online brokerage by completing an application. Here's how to get started in 6 steps.

1. Figure out where to open a brokerage account

Ask yourself: What are my primary investing objectives? For example, if you want the ease and convenience of having everything in one place, you could consider the broker where your company has its 401(k) plan or where you already have an IRA.

Considerations could also include whether the company offers account features you like and will use, if its customer service is responsive, how easy it is to navigate its website and/or app, and how much it charges in commissions and fees.

(Psst ... here's where you can learn about investing at Fidelity.)

2. Decide what kind of account you want

You can approach investing within a brokerage account in a few different ways. You might opt to DIY your investments and manage them yourself. Or you could work with a financial advisor to get help selecting and managing your investments for a fee. For something in between, you might consider a robo-advisor, which can help you build a portfolio using technology that takes into consideration your goals, risk tolerance, and time horizon, among other variables. Robo-advisors typically have lower costs than working directly with a human financial advisor.

You'll also need to decide if you want a cash account or a margin account. A cash account means you buy investments with money in the account. A margin account means the brokerage loans you money that you can use to buy securities (hence the phrase “buying on margin”). Only investors who fully understand the risks (including the possibility of magnified losses) should consider enabling margin trading. The brokerage, too, is taking on risk when they lend to you, so there are many rules governing these types of accounts. Just like with any loan, you're on the hook for that money, which you can repay with other money you have, by selling investments for cash, or depositing fully paid-for stock shares as collateral.

3. Fill out the application

A brokerage account application will usually ask for personal details, employment info, investment profile, and, if you'll be investing online, bank information. The process could take only a few minutes online.

4. Fund your account

Once you open a brokerage account, you can link it to a bank account and transfer money. Once you've been approved to trade and have funded your account, you are ready to invest. Keep in mind that some securities require minimum investments, though you may be able to start investing with as little as $1 by buying fractional shares in certain stocks and ETFs.

5. Invest using the cash in your account

Even if you've transferred money into your brokerage account, you haven't invested until you make a transaction. If you don't, your money will sit in an account called cash reserves, core, or sweep account. While these accounts pay some interest, you're missing out on any potential gains from investing in stocks and bonds that have a chance to benefit from compounding returns over time.

In addition to one-off investments, you may also choose to set up auto-invest, which is when you invest a certain amount of money at specific intervals no matter what the price of a security is. This is a strategy known as dollar-cost averaging, which is when you invest at regular intervals regardless of the price. Dollar-cost averaging keeps you continually investing in the stock market and may also result in a lower price per share over the long term.

6. Check in on your investments

Whether you are doing it yourself or working with a financial professional, monitor your investments periodically. Fidelity recommends doing this at least annually, after a major change in financial circumstances, a life event like marriage or having a child, or after big market swings to see if your resulting portfolio still aligns with your financial goals, risk tolerance, and time horizon.

For instance, when you first invested, you might have split investments into 60% stocks and 40% bonds. But thanks to market fluctuations, you might now have 75% of your money in stock investments with bonds at 25%. Depending on your specific goals, you can adjust your holdings by rebalancing, or buying and selling investments to help keep a portfolio in line with an investment strategy.

Open a brokerage account

It's easy! Open your new account in just minutes.

More to explore

For a distribution to be considered qualified, the 5-year aging requirement has to be satisfied, and you must be age 59½ or older or meet one of several exemptions (disability, qualified first-time home purchase, or death among them).

A distribution from a Traditional IRA is penalty-free provided certain conditions or circumstances are applicable: age 59 1/2; qualified first-time homebuyer (up to $10,000); birth or adoption expense (up to $5,000 per child); emergency expense (up to $1000 per calendar year); qualified higher education expenses; death, terminal illness or disablility; health insurance premiums (if you are unemployed); some unreimbursed medical expenses; domestic abuse (up to $10,000); substantially equal period payments; Qualfied Federally Declared Disaster Distributions or tax levy.

This information is intended to be educational and is not tailored to the investment needs of any specific investor.

Investing involves risk, including risk of loss.

Past performance is no guarantee of future results.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.

Diversification does not ensure a profit or guarantee against loss.

Dollar cost averaging does not assure a profit or protect against a loss in declining markets. For a Periodic Investment Plan strategy to be effective, customers must continue to purchase shares both in market ups and downs.

In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible.

As with all your investments through Fidelity, you must make your own determination whether an investment in any particular security or securities is consistent with your investment objectives, risk tolerance, financial situation, and evaluation of the security. Fidelity is not recommending or endorsing this investment by making it available to its customers.

Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.

The third parties mentioned herein and Fidelity Investments are independent entities and are not legally affiliated.

Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

© 2024 FMR LLC. All rights reserved 1131394.1.0