What is a Brokerage Account?
A brokerage account is a taxable investment account in a brokerage company where a person deposits its assets and instructs the company to trade in shares or bonds on his/her behalf. The brokerage company then trades on behalf of that person after deducting some brokerage or commission. An investor who owns the money that has been deposited into this account can sell his/her assets and take out his investment any time from that account.
How Does it Work?
There are many brokerage options available nowadays, which provide options to open an account for its subscribers at different brokerage rates and account opening charges. Investors have to pay a very minimal amount to open their account. Money can be easily transferred from a checking or savings account to the brokerage account and vice versa. A user can easily change his account from one brokerage house to another. Money can easily be transferred from one account to another. Gain on assets in this account is taxable.
Nowadays, there are different types of services that the account provides. Their fees also vary depending upon the services they offer. Fees can be depending upon 2 types of services:
#1 – Full-Service
In a full-service account, an investor gets the services of expertise of a brokerage account. Brokerage houses can charge monthly or annually for the advice. Also, these kinds of the house can take a commission on again on trades. An investor should discuss the fee structure depending on his preference and frequency of the trading. Investors with little knowledge about the share market can open this kind of account to gain some knowledge from experts by paying some extra fees.
#2 – Discount
Brokerage house gives the option to investors to make investing by themselves without any consultation from a brokerage house. Fees structure is quite lower as compared to a full-service account. These kinds of accounts are suitable for investors who have some knowledge about investing and market conditions.
Service Offered by Brokerage Account
Below are the services that can be offered depending on the type:
- The full-service account provides periodical financial analysis on the market and companies. They also provide a suggestion on the type of investment that a user should do depending upon his investment horizonInvestment HorizonThe term "investment horizon" refers to the amount of time an investor is expected to hold an investment portfolio or a security before selling it. Depending on the need for funds and risk appetite, the investor may invest for a few days or hours to a few years or decades..
- The full-service account provides tax advice also to the users.
- A margin brokerage account can lend money to its users at certain interest rates. With this facility, users can invest without their own money.
- Accounting opening, money transfer, and investing can be done online.
Brokerage Account Opening Process
Nowadays, such an account can be opened very easily online in a few minutes by entering details and uploading identity proof. In some cases, the user will have to post the documents to the account address for verification. After activation of an account, the investor will have to transfer the deposit amount from his saving account to the brokerage account. At the time of the account opening, the investor will be asked to open either a cash account or a margin account.
- Cash Account: An investor will have to pay the full amount in cash to invest in any kind of security. There won’t be any facility of lending money from an account.
- Margin Account: In a margin account, an investor can have the facility to borrow money from the brokerage house against the security at a certain interest rate. The brokerage house will automatically square off the position as soon as the margin call gets initiated. A margin account is a risky ball game, which is a bit complex also. Investors can make huge profits and also incur huge losses with these margins calls and auto square-off positions.
- Having a brokerage account does not guarantee a gain on investment. There are more experienced players who are playing in the field, and investors will have to compete against these players to have good gains.
- The market condition can change overnight. So an investor needs to do constant monitoring on his investment and also market conditions.
- Gain on investment in these accounts is taxable.
A brokerage account can be a very useful medium and tool for users to start investing in share and bond markets. History suggests that long term gain in the share market is always higher than other instruments. Nowadays, because of excess competition, the fee structure of these accounts is getting lower, and because of that number of users having these accounts is getting increased day by day. But users will have to be wary of the greed while investing in the stock marketStock MarketStock Market works on the basic principle of matching supply and demand through an auction process where investors are willing to pay a certain amount for an asset, and they are willing to sell off something they have at a specific price. and beware of fraudulent calls.
This has been a guide to what is a brokerage account and its definition. Here we discuss the working and opening process of brokerage accounts along with fee structure and services offered. You can learn more about accounting and financing from the following articles –