Financial Jargon Busting What is a brokerage account?

There are lots of ways for investors to diversify their portfolios. One of the more common options is the brokerage account. A brokerage account is an investment account that allows you to buy and sell securities like stocks, bonds, and exchange-traded funds (ETFs). Unlike retirement accounts, taxable brokerage accounts have no strict rules on contributions or withdrawals, offering greater flexibility.

Let’s take a closer look at brokerage accounts and what you need to know before opening one.

What is a brokerage account used for?

A brokerage account can be used to buy and sell stocks, bonds, mutual funds, ETFs and other securities. A person can transfer money into and out of a brokerage account, like they can with a bank account, which can be helpful for everything from long-term investing to short-term day trading.

How much money do you need to start a brokerage account?

The minimum starting deposit for brokerage accounts varies. Some brokerage firms don’t have minimum deposit restrictions, while others do. That’s why it’s important to shop around when considering a brokerage account. Because there are so many options, it’s a good idea for investors to research a variety of brokerage accounts and compare them to choose the one that is right for their budget and goals.

How is income from a brokerage account taxed?

When people sell an investment made through a taxable brokerage account, they generally must pay taxes on the resulting income on a current basis. The character of the income – as ordinary income or capital gain arising from the sale of an investment held in the brokerage account – depends on the type of investment and how long it has been held. Additionally, if a person earns income from brokerage account investments, like dividends or interest, these proceeds will generally be subject to tax on a current basis.

What are the benefits of a brokerage account?

There are restrictions surrounding when people can withdraw money from retirement accounts and how much they can contribute to these accounts each year. There are almost no such restrictions for taxable brokerage accounts. Typically, people can put as much money into taxable brokerage accounts as they want or take out any amount, for any reason and at any time.

What is the downside to a brokerage account?

One of the main differences between a taxable brokerage account and other options, such as a retirement account, is how they are taxed. Accounts that are specifically designed for retirement, such as IRAs and 401(k)s, provide tax advantages that taxable brokerage accounts do not offer. Specifically, the income within retirement accounts can grow on a tax-deferred basis – but this comes with a number of restrictions, including the amount of money that can be contributed to the account and when money can be withdrawn from the account.

Types of brokerage accounts

There is a wide variety of options when it comes to brokerage accounts – from automated robo-advisor options to full-service professional brokerage firms offering a range of financial services. Fees and requirements for these different types of accounts vary. Some brokerage accounts require a minimum balance to open an account. Others may charge trading commissions for certain assets or management fees. When deciding which type of brokerage account to use, investors should think about the amount of time they want to spend managing their portfolio, their investment experience and what fees make sense for their goals.

Beyond the type of account, there are two main ways taxable brokerage accounts are structured: cash accounts and margin accounts. With a cash account, investors can purchase securities only with the money they have in their account at that moment. In contrast, with a margin account, an investor can borrow money to buy securities, using those investments as collateral for the loan. Margin accounts allow investors to engage in more complex trading, however, they are riskier than cash accounts. For example, if an investment’s value drops, a brokerage firm may perform what is known as a margin call and ask investors to pay back their margin debt immediately. Also, with a margin account, a firm is allowed to sell investments in a portfolio to cover an account deficit.

Let’s take a closer look at the brokerage accounts that are available to investors.

Full-service brokerage accounts

Full-service accounts tend to partner you with an investment specialist. These specialists can give you financial advice, help you build a portfolio and may even make trades on your behalf. The trade-off is that full-service brokerage accounts typically charge a fee.

Robo-accounts

Robo-accounts are what they sound like: brokerage accounts that utilize automated algorithms to manage your portfolio. Robo-accounts still offer a plethora of customization options based on your financial goals, risk tolerance and budget. Despite being automated, most robo-accounts charge a fee, although it’s typically less than what’s charged by a full-service brokerage account.¹

Self-directed brokerage accounts

These types of brokerage accounts don’t usually offer any type of professional or algorithmic management or guidance. Instead, the operation of your account is left entirely to you. You get access to an online brokerage platform to trade in securities on your own initiative. This access might come with an annual fee as well as percentage commissions on some types of securities trades depending on the account.²

Choosing the right brokerage account for you

Whether you’re looking for a full-service experience, an automated solution or a self-directed platform, it’s essential to compare your options before opening a brokerage account. Balancing fees, minimum deposits, tax implications and the flexibility offered by different account types can help ensure that you find the right fit for your investing style and long-term strategy.

Here are a few tips to help you choose the right one for you:

• Know your investment style. Knowing what you’re looking to get out of your brokerage account will help guide you toward looking in the right places. For example, do you want an account to manage everything for you, or do you want the flexibility to make your own choices?
• Compare fees and commissions. Look for accounts that offer competitive rates and low trading fees and maintenance charges.
• Research account minimums. Different brokerage accounts have different minimum account balance requirements. Depending on your financial circumstances, this could help you narrow down your options.
• Consider accounts that allow fractional shares. Some accounts will let you purchase partial shares of stocks, which can be helpful if you’re interested in stocks with high share prices.

The bottom line

Taxable brokerage accounts allow you to buy and sell securities without restrictions on contributions or withdrawals. They might be the right choice for investors who value flexibility and the option to invest in a wide range of securities.

Consider reaching out to one of J.P. Morgan’s knowledgeable financial advisors to get a better understanding of the benefits and drawbacks of each account type to build a portfolio that aligns with your personal investment goals.