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A brokerage account is similar to a savings account, but for investing. A regular bank might offer an account with a high annual percentage yield (APY) that earns interest on the money you deposit, allowing you to stretch those dollars a little further. A brokerage account, on the other hand, opens the door to a wide range of investment opportunities, such as stocks, bonds, and mutual funds that can make your money work much harder over time.
There are many types of brokerage accounts, and each works a little differently depending on how it’s set up. Let’s start with a simplified brokerage account definition: a means for investors to participate in the stock market. The broker holds your account and acts as an intermediary between you and your investment purchases.
There is the Cash Broker Account where investors deposit cash that’s used to pay for the shares or securities purchased. They don’t require a lot of money to open—many brokerage firms will allow you to create one with no initial deposit required. However, before you can buy any investments, you’ll first need to add funds to the account for purchasing power.
A margin account lets investors borrow money from the brokerage firm to buy shares and securities, with the assets in the portfolio serving as collateral on the loan. Buying investments on margin can dramatically increase your purchasing power, but it can involve a high level of risk.
Below are some of the most popular investments you can purchase on your own or through a broker with your brokerage account:
Bonds
These lower-risk investment vehicles are more stable than stocks but usually offer a lower yield over time.
Real Estate Investment Trusts (REITs)
You can also open a brokerage account to purchase REITs, or pools of real estate-related assets.
Preferred stocks
Shareholders of preferred stocks typically receive higher dividend payments than common stocks but are more sensitive to changes in interest rates.
Common stocks
These are very common and represent shares of ownership in a business organization. You can earn money off them by collecting dividend payments or by selling the stock in your brokerage account when the price is higher than what you paid for it.
Mutual funds
A mutual fund refers to a pool of money collected by investors who mutually purchase stocks, bonds, and various assets.
If you’re wondering how brokerage accounts works best, it is important to know that all investments involve some level of risk. There is no singular “right” answer regarding which type of brokerage account you should open to start building your own investment portfolio; it all depends on your experience and knowledge of trading on the stock market, how much risk you’re willing to take on, and what your budget can afford.
Just endeavor to always do your research and be sure to avoid investment errors common to new-comers on the market.
