Brokerage Accounts, Explained

Introduction

If you want to trade or invest in stocks, ETFs and other securities, you’ll need to open and fund a brokerage account. There are two primary types of brokerage accounts: full-service and discount. Investors who want the expertise of a financial advisor may prefer full-service firms, which offer a large range of investment options and advice, including personalized financial and retirement planning – with higher fees. If you’re comfortable with a do-it-yourself approach, a discount brokerage firm, which offers fewer services and lower costs, may be a good choice. Some brokers – such as Charles Schwab – offer both full-service and discount brokerage services to cater to all types of investors.

Since brokers are not all the same, choosing one takes careful consideration. While most people look first at commissions, there are other factors that should be evaluated, as well – such as the broker’s supported products (e.g., stocks, futures, options), the robustness and flexibility of the trading platform (are there desktop, web-based and mobile platforms?), its industry affiliations and its customer support options.

You can find broker ratings online – including Investopedia’s own comprehensive broker reviews, platform walkthroughs, and ratings on transparency and fees. These can be valuable resources when picking a broker. It’s also helpful to take your list of potential brokers and review each broker’s website, speak with its customer support representatives (and ask lots of questions) and try out its software if it offers a demo. To help you get started, here are the basics of online brokerage accounts, plus questions you should ask before opening an account.

Fees and Products

You’ll typically pay a commission to your broker each time you buy or sell a security. Commissions can vary widely, depending on the broker and the investment. In general, the more frequently you trade, the more important it is to pay attention to these costs. If you plan on placing two stock trades per year, for example, the difference between paying $4.95 and $6.95 per trade is negligible (and not really a factor). If you’re an active trader who trades several times a day, however, that two-dollar difference will add up over time. Some brokers offer better rates if you maintain a high account balance, trade frequently in small blocks or if you’re a high-volume trader.

When comparing brokers, be sure to look at the costs you’ll pay, based on your account size, trade size/frequency and preferred markets – and prioritize low commissions on the products you’ll trade most. It’s important to note that the commission your broker charges may not be the only fee you pay to trade. If you buy and sell futures contracts, for example, you’ll also be responsible for exchange and NFA regulatory fees. And while forex brokers don’t technically charge a commission, they do roll their fees into the bid-ask spread – the difference between the price they pay for the currency and the price they sell it for. You may also have to pay for trading platform fees, premium research and/or data, paper statements (as opposed to electronic ones) and broker-assisted trades. Be sure to do your homework so you know exactly what you’ll be charged.

While commissions are a key factor when choosing a broker (especially if you trade frequently), make sure a potential broker offers the products you want to trade – whether that’s stocks, ETFs, futures, forex or options. Some brokers offer access to virtually all types of instruments, while others focus solely on, say, futures or options. Note that you may need to open more than one account at the same brokerage if you want to trade multiple types of investments.

Trading Platform

A trading platform is the interface you use to buy, sell and manage trades through your broker. Most brokers offer some combination of desktop, web-based or mobile trading platforms, either for free or for a monthly or annual fee. Brokers that do charge a platform fee may discount or eliminate the fee if you maintain a certain account balance or make a minimum number of trades each month.

Since the trading platform is your portal to the markets, it’s important to choose a broker that offers a platform that meets your needs. If you’re a very technical trader, for example, you may need a platform that offers advanced charting, a wide selection of technical analysis tools and the ability to “draw” trendlines, Fibonacci arcs and the like. If you prefer fundamental analysis, on the other hand, the platform should offer plenty of access to financial ratios, reputable analyst ratings and reports.

Especially if you’re an active trader, pay extra attention to the platform’s order entry interface – the method you’ll use to enter and exit trades. Look for interfaces that are well-designed, intuitive and easy to use. Many platforms, for example, offer chart trading, which allows you to buy and sell securities by clicking on a price chart – a fast way to place trades at your desired price level. If you want to access your account or trade “on the go,” be sure the broker offers trade entry on its mobile app.

Finally, if you require any special features – such as access to robo-advisors, advanced order types (e.g., OCOs and bracket orders), simulated trading or the ability to program your own technical indicators – check with the broker to make sure these options are available. In some cases, the advanced features may be available only through the broker’s “pro-level” platform, so be sure to ask if there will be any additional fees to use those features.                       

Research Tools and Resources

Most brokers offer a suite of research tools and resources to help you make better trading and investing decisions. These may include financial ratios, analyst ratings, news feeds, economic calendars, daily newsletters, screeners, wizards (such as bond ladder wizards), premium research, and educational content, including articles, videos, webinars and live events. Some brokers offer “in-house” research, and most provide access to a variety of third-party providers, including Argus, Barclay’s, Credit Suisse, Morningstar, Standard & Poor’s, Thomson Reuters, Vickers and more.

In addition to the standard research offerings, many brokers now provide some type of social interface, which allows customers to view sentiment data, compare strategies, dissect past mistakes and build their market skills in a social environment. If social insights are important to you, check with your broker to make sure that’s something it offers.

Funding and Withdrawal

Before you can start investing or trading, you’ll need to fund your account. If you have a cash account – where you pay the full amount for any securities you buy – you’ll have to meet your broker’s required account minimum, which can range from just $100 to upwards of $10,000.  

The rules are different for a margin account – a type of brokerage account through which your broker lends you money to buy securities, using your account as collateral. While having a margin account increases your buying power, it’s important to recognize that it also magnifies your losses. Before you trade on margin, FINRA requires you to deposit a minimum of $2,000 or 100% of the purchase price of the securities, whichever is less; your broker may require you to deposit more.

Most brokers accept account funding through check, ACH (electronic bank deposit), wire transfer, physical stock certificates and the transfer of cash and securities from another brokerage account. It can take anywhere from 30 minutes to about a week to complete the funding process, depending on the method. Your broker will let you know which methods it accepts and how long each takes.

If you need to withdraw funds from your account, you can make a partial withdrawal or close your account by requesting a wire transfer, check or money transfer. Most requests can be handled by logging on to your account online or through your broker’s mobile app. Contact your broker’s customer support line or check the website for funding and withdrawal instructions – and to inquire about any withdrawal fees that may apply.

Customer Support

Odds are, you will have to contact your broker’s customer support department at some point – for help logging in to your account, to check margin requirements or to ask about something on your account statement and the like. Ideally, your broker will offer numerous ways to connect, including by phone, email, secure messaging, live chat, fax, text, Facebook Messenger and via in-person support at branch locations. It’s a good idea to have your broker’s contact info handy – for instance, as a contact in FB Messenger, in your mobile phone contacts, bookmarked in your web browser and on a piece of paper next to your desk – so you can reach the broker quickly in an emergency.

Because so many markets trade round-the-clock (or close to it), it’s important that your broker’s support hours match the markets you’re trading. As a forex trader, for example, you might be placing trades in the middle of the night – so you should be able to connect with customer support or the trade desk during those hours.

Many brokers now offer dedicated lines for support in different languages (e.g., Spanish, Cantonese and Mandarin); if you’ll need that option, be sure to check. Also, learn if the broker offers any accessibility services if you think you’ll need them. Look for telecommunications relay, statement alternatives, sign language and oral interpreter services.

A quick “test” chat or call can give you an idea of the customer service a broker provides, its wait times, and the representative's ability to concisely answer questions regarding account requirements, commissions and fees, regulation and company details, including how long it has been in business and the size of its trade volume (larger brokers generally have access to better prices and execution).

Trust

Reputable brokers will be registered with and/or be members of various regulatory agencies. The U.S. Commodities Futures Trading Commission (CFTC), for example, requires all futures commission merchants (FCMs) and introducing brokers (IBs) to be members of the National Futures Association (NFA) – an industry-wide, self-regulatory agency for the U.S. futures industry that develops rules, programs and services to maintain the integrity of the market, protect traders and investors, and help NFA members meet their regulatory responsibilities.

FINRA – or the Financial Industry Regulatory Authority – is the largest self-regulatory organization in the securities industry. With few exceptions, broker-dealers must be members of FINRA, which is overseen by the Securities and Exchange Commission (SEC). Other account protections to look for include FDIC, which protects cash deposits held at member institutions, and SIPC, which works to restore customer securities and cash if a brokerage firm goes under (note that nothing protects you against losses that result from bad investment decisions).

Your broker should also provide some type of guarantee that you won’t be responsible for any losses due to unauthorized activity – much like the protection offered by credit card companies. With TD Ameritrade’s Asset Protection Guarantee, for example, if you lose cash or securities from your account due to unauthorized activity, TD Ameritrade will “reimburse you for the cash or shares of securities you lost.”

It’s important to recognize that a professional-looking website does not imply or guarantee that a broker is registered with or a member of the relevant agencies. Reputable brokers will state these affiliations on their websites, typically in the “About Us” section and at the bottom of each web page. You can confirm a broker’s affiliations by checking on the FINRA, CFTC and SIPC websites.  

The Bottom Line

Before you compare brokers, it’s helpful to make a list of questions to ask each firm on your list – and take good notes so you can keep track of the responses. Your list of questions might include:

  • How many years has the broker been in business? What is the size of its trade volume?
  • Is this a margin account or a cash account? What are differences between the two?
  • Who controls decision-making in my account?
  • Can someone show me a demo of the trading software?
  • When and how will I get statements? Who will send the statements?
  • What fees will I pay? How much are commissions? What are the account minimums? Are there any account maintenance, account transfer, account inactivity, wire transfer and other fees I should know about?
  • Which agencies is the broker registered with or a member of?
  • What services will I get with the account?
  • Does the broker offer any commission-free products or sign-up bonuses?

Keep in mind, even if you choose the perfect broker now, your needs may change in the future as you trade different instruments, decide you need more – or less – advice, and develop your trading or investing style. Today, for example, you may want a full-service broker to help you invest in stocks, but in five years you may be ready to trade futures on your own. Bottom line: whichever broker you choose now doesn’t have to be your forever broker. It’s easy enough to open an account – and transfer funds between accounts – that you could do it again if your needs change down the road.