What is a brokerage account and why do you need one? A complete explanation for beginners

George Sweeney 14th Apr 2022 One Comment

Reading Time: 6 minutes

When you’re starting out as investor, it can feel like information overload. Once you make the decision to learn more about the world of investing, you need to find somewhere to actually invest. That’s where a brokerage account comes into the picture.

This guide covers everything you need to understand about investing platforms and brokerages. You’ll learn how these accounts work, the different types available, and what you need to do to actually open an account with a stock broker.

Keep reading for all the essential information or click on a link below to jump straight to a specific section…

• What is a broker?
• What is a brokerage account?
• How they work
• Different types of accounts available
• Can you lose money?
• How to open an account
• What else investors need to know

 

What is a broker?

Brokers are companies or individuals (middlemen/women) who help to facilitate some sort of transaction or deal. You’ll find them in many industries outside of investing.

The common term used for investment intermediaries is a ‘stock broker’ or ‘stockbroker’, either is fine. Not a very original name, but it keeps things simple!

Don’t be alarmed if the term ‘stockbroker’ conjures up all sorts of negative stereotypes in your mind.

Perhaps Gordon Gecko? Or Wolf of Wall Street types in stuffy suits? You know the ones – working in the ‘Big Apple’, drinking dry martinis by day and eating at outrageously expensive restaurants by night.

That may have been how things used to be, but they’re not all a bad bunch! And, in most cases nowadays, you’ll be dealing with companies or websites instead of individual brokers.

 

What is a brokerage account?

This is a personal account you can hold with a company that allows you to buy and sell investments. You can deposit money into these accounts and then use the funds for investing.

Brokerage accounts can go by a variety of names:

• Share dealing account
• Investment platform
• Investing account
• Stockbroking account

They all have the same purpose – to connect buyers and sellers of assets. Simply put, it’s just a place that allows you to buy or sell assets.

So, you can use these accounts to buy stocks, shares, index funds, ETFs, commodities, and sometimes even cryptocurrency. Your complete range of choice will depend on the brokerage you pick.

Using a brokerage account saves you time and energy because it would be such a headache trying to invest in assets directly. No one wants to go through the hassle of contacting each company or fund every time you want to make a small investment.

 

How do brokerage accounts work?

In past yesteryears, if you wanted to invest using a stockbroker, it was a real pain in the backside.

It was a much more personal arrangement, where to a certain extent, you’d know your individual stock broker. So, if you wanted to buy shares, you’d have to:

• Contact your stockbroker.
• Tell them what shares or investments you wanted to buy (or sell).
• Sit on your hands whilst they ran about to do your bidding.
• Pay a hefty fee and get confirmation (potentially days later) that your order had been successful or unsuccessful.

Thankfully, modern technology has streamlined this process. And this is where brokerage accounts earn a spot in the limelight.

Once you’ve set up an account with your chosen platform, you can deposit funds and then select what you’d like to do with the money. Everything runs smoothly in the background, and your transactions or orders often take place instantly.

Although you keep your investments and funds within the brokerage account, it’s still all completely owned by you.

 

What are the different types of accounts available?

The main types of brokerage accounts available are online accounts, managed accounts, and robo-advisors.

Online brokerage account

This type of account is easy to set up if you’re a beginner investor.

An example of a popular platform in the UK is eToro. Once you’re set up, you’re able to instantly buy or sell a whole range of investments.

You can manage your whole account and portfolio online (through a website or application). This means you don’t have to worry about finding the time to do things in person.

Or, spend endless amounts of time calling up your stockbroker. In the past this could mean getting stuck on hold and listening to repeating jingles, waiting patiently as share prices rose or fell.

Investing using an online brokerage is usually the cheapest way to invest, and – most suitable for those of you making smaller transactions.

Managed brokerage account

If you’re someone who prefers to do things in person, then you might want to use a financial adviser to help you buy or sell investments.

Although dealing with real people can give you some peace of mind, investing this way does have its drawbacks.

The expert advice and support will usually cost you a decent up front fee. Or, an ongoing fee based on the size of your portfolio.

Also, some wealth managers will only work with you if your portfolio is worth a big chunk of change – which sometimes isn’t helpful for beginners.

This method can also be a bit slow and inefficient as you have less control over everything. And, it adds another step of friction when you’re looking to buy or sell investments.

Robo-advisors

A useful alternative to an account managed by a financial adviser is a ‘robo-advisor’ platform. These usually come with much lower investing minimums and smaller fees.

You don’t get that personal touch, but the snazzy computer algorithms will build and manage your investment portfolio, handling everything automatically.

All you need to do is set up your account, choose your investing style, then regularly invest savings into your portfolio.

 

Can you lose money in a brokerage account?

Yes. No matter what platform you use or how you decide to invest, there will always be the risk of getting out less than what you put in.

You can minimise this risk by choosing more stable investments and making sure you keep a diversified portfolio.

But, it’s often the risky or volatile investments that carry the greatest potential rewards. So, you need to think about your own tolerance for risk before you start investing.

If you opt for a robo-advisor, you’ll likely fill out a small questionnaire on your risk appetite, and this will help you choose the right managed portfolio.

 

How do you open an online brokerage account?

The exact process will depend on the platform you choose.

Often, a brokerage account can be set up within minutes. Here’s a rough outline of the account opening process:

1. Research and decide which brokerage platform you’d like to use.
2. Gather up your personal information (ID, NI number, proof of address, email address etc.).
3. Follow the broker’s sign up process, either on their website or on their app, inputting your details.
4. Once the account is open, you can deposit funds and begin making orders to start investing.

If you decide a robo-advisor is what you want, there will be some extra steps. This is to assist you with selecting the right investing profile and strategy based on your goals and risk tolerance.

 

What else do beginner investors need to know?

Finding the right brokerage account and setting yourself up on the platform is a big step.

But, there’s no need to rush yourself. So make sure you’re comfortable with your investing plans and take your time to find the right platform.

You aren’t tied down to one brokerage either. It’s often free to open an account, so you can try out a few different platforms to see which one you like the most.

And, always make sure you do plenty of research before diving into any investments.

If you want to keep up with the latest market news and insights, sign up to our fortnightly Investing Newsletter and check the MoneyMagpie website for regular investing tips and guides.

This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money.