Checking and brokerage accounts share a substantial similarity: They’re both “containers” that hold money used to achieve your financial goals. A checking account uses your cash to pay for everyday expenses. A brokerage account uses your cash to purchase and hold securities.
These unique “containers” play a role in multiple steps of your wealth-building journey, from retirement and educational savings to trading assets like stocks.
A brokerage account is a special account where you can buy, hold and sell different investments. These accounts act as your gateway to owning various assets — like stocks, bonds, mutual funds and exchange-traded funds (ETFs) — that can appreciate over time.
While it’s possible to buy stock directly from companies with direct stock purchase plans, these plans can be costly and in limited supply. You also can’t walk into major stock exchanges like the National Association of Securities Dealers Automated Quotations (Nasdaq) and the New York Stock Exchange (NYSE) and place trades on your own. You need a licensed intermediary who has access to those markets.
When you open a brokerage account, the brokerage firm acts as that intermediary and executes trades on your behalf.
After depositing cash, you can buy a wide range of investments, including stocks, mutual funds and ETFs. Some accounts also give you access to securities like individual bonds and cryptocurrency, too. When you’re ready to sell, you’ll enter a sell order to turn your assets back into cash.
Expert tip: When you place a sell order, your sale has to “settle” before you can access the cash. The settlement time is called T+3, which stands for “day of trade plus three days.” For example, if you sell a stock on Monday (T), the cash won’t be available for withdrawal until the end of the market day on Thursday (three full days after the trade).
You can use brokerage accounts in several ways, including:
The market is flush with brokerages anxious for your investment dollars. But should you opt for a do-it-yourself approach or go with a full-service financial advisory firm? Let’s look at the most common places to open a brokerage account, including the type of investor best suited for each.
When you think “full service,” think big. Full-service brokerages come with all the investor bells and whistles, from dedicated financial advisors and analyst teams to personalized advice and investment recommendations. Yes, you’ll pay more than other brokerage options, but if you go full service, you’re willing to pay for that service.
Best for: Investors who want ongoing guidance for the entirety of their financial lives and are willing to pay a bit more for concierge-type service.
For the do-it-yourself investor, online brokerages put you in the driver’s seat. While functionality varies by broker, you’ll generally find a wide variety of investment options, screening and analysis tools and low costs to entice you to open an account.
Why “entice”? As of 2022, the U.S. boasts 246 different online brokers, and online brokers know you have plenty of choices. You’ll often find bonus offers available like free shares of stock or a cash bonus. But before opening an account, be sure to review annual fees, commissions and other types of charges you might encounter as fees vary widely.
Best for: New or seasoned investors who want to keep costs low yet gain access to a wide range of investment types.
The robo-advisor sits somewhere between full-service and self-service investing. Robo-advisors take data about your goals and preferences and transform it into a custom investment portfolio.
Once you fund your account, the robo-advisor does the rest for you, including placing new buy orders and rebalancing your portfolio. Some robos even offer free access to traditional financial advisors or via a la carte pricing. We’ve reviewed the top robo-advisors in the market, including a complete evaluation of all the services they offer if you want to explore robos further.
Best for: Investors who want many of the benefits of a traditional financial advisor but prefer the lower costs of an online brokerage.
The type of account you open will depend on your investment goals. Here are the most popular account types, along with the type of investor best suited to each:
|Account type||Losses||Best for…|
|Cash accounts|| |
|Margin accounts|| |
|Retirement accounts|| |
|Cryptocurrency accounts|| |
You can think of a cash brokerage account as a wallet without credit cards. With both, your buying limit equals the cash you have on hand.
With a cash account, you’ll be able to buy and sell any securities offered by the brokerage of your choice. Your brokerage may also offer Securities Investor Protection Corporation (SIPC) insurance, which covers your cash and assets up to $500,000 should the brokerage become insolvent.
A margin account is like a wallet with a bit of cash and lots of credit cards inside.
Margin accounts let you buy securities using a loan from the brokerage called a margin loan. You’ll also be required to put up collateral for your loan, which can be cash, securities or a combination of the two. Unlike cash accounts, margin accounts expose you to a high potential for loss, which we cover in-depth in our guide to day trading.
If you want to open an IRA or a small business retirement plan like a SEP IRA or SIMPLE IRA, you’ll need a specialized brokerage account. Retirement brokerage accounts must abide by specific rules outlined by the IRS. The IRS sets rules that govern annual contribution limits, income limits and withdrawal and taxation guidelines.
If you have the itch to dabble in cryptocurrency, you’ll need to open a special brokerage account with a cryptocurrency brokerage. These accounts can only hold digital assets and are generally not covered by SIPC insurance. Therefore, it’s important to keep the cash in a cryptocurrency brokerage account to a minimum in case the brokerage suffers liquidity problems or becomes insolvent.
No matter where you decide to open your account, you’ll experience a similar process:
As you start using your brokerage account, remember: Start slow. Take the time to get to know how your brokerage account and its available functions before diving into advanced trading strategies like options and day trading. And if you need help choosing where to open your account, check out our vetted list of the best online brokers.
Depending on your needs, it can make sense to have multiple brokerage accounts, especially if you have different goals for each account. For example, you may have one brokerage account that’s a taxable brokerage account for trading stock and another account that’s for cryptocurrency. You may also have a personal retirement account as one of your brokerage accounts, too.
The best brokerage account to suit your needs comes down to a combination of available investments and your investment goals. Be sure to compare key features between all brokerages you’re considering, including account fees, trading commissions, funding options and whether they offer the types of securities you’re interested in owning.
Assets in brokerage accounts are not FDIC-insured, as that type of insurance is reserved for banks. Instead, brokerage account assets are protected by Securities Investor Protection Corporation (SIPC). This insurance covers you against the loss of assets and cash should your brokerage run into financial trouble and covers up to $500,000 in assets — only $250,000 of which can be cash.
The “Find a Financial Advisor” links contained in this article will direct you to webpages devoted to MagnifyMoney Advisor (“MMA”). After completing a brief questionnaire, you will be matched with certain financial advisers who participate in MMA’s referral program, which may or may not include the investment advisers discussed.