7 Things to Know About Your Brokerage Account

Your brokerage account can help or hurt you more than you might expect.

Jul 24, 2014 at 9:58AM

Source: Wikimedia Commons.

Maybe you have a brokerage account and have been using it for many years. Maybe you're not yet investing on your own but are planning to get a brokerage account soon so you can start. Either way, there are probably some things you don't know about the typical brokerage account.

1. Your brokerage account is generally protected
Just as our government insures our bank accounts through the Federal Deposit Insurance Corporation (FDIC), it also protects our brokerage accounts through the Securities Investors Protection Corporation (SIPC). Just to be clear, you're not protected from losses due to regrettable investing decisions; if you invest in a stock that plunges, don't expect anyone to cover your loss. However, you are offered protection from the failure of your brokerage: As the SIPC explains, "Within limits, SIPC expedites the return of missing customer property by protecting each customer up to $500,000 for securities and cash (including a $250,000 limit for cash only)." When selecting a brokerage, be sure it's a member of the SIPC.

2. Brokerage accounts often harbor hidden fees
It's usually pretty clear what your brokerage account will charge you to place a trade order. But there are a lot of charges that go unnoticed by many customers. You might, for example, be charged an annual account fee or an inactivity fee. Know that you can find brokerages that don't levy those fees -- which is especially handy, as trading infrequently and having a less active account can lead to superior portfolio results. Know, too, that while many brokerages will pay you interest on the cash you keep in your brokerage account, others won't. That can be a big deal if you're holding a lot of cash, especially in periods of higher interest rates. And think about your regular trading commission, too; you don't have to pay more than a few dollars per trade at many solid brokerages. If you're paying $25 per trade (or, heaven forbid, $250) and trading often, you're spending more than you probably should.

3. There are many different kinds of brokerage accounts
Most brokerages offer a range of different accounts beyond the standard non-tax-advantaged brokerage account. Learn what your brokerage offers, as you might want to open one or more other accounts. There are usually retirement accounts, for example, such as traditional or Roth IRAs and SEP IRAs. And those brokerages that feature banking services will offer checking accounts. There are custodial accounts you can open to get your kids into investing early. You may also be able to open a college savings account, an investment club account, a small-business account, or some other kind of handy account.

4. You can borrow money from your brokerage to invest with
If you've heard of people investing "on margin," that means they're investing with money borrowed from their brokerage. You pay interest charges, of course, for this privilege, and while investing on margin can amplify your gains, it can also steepen your losses. Investing on margin should not be done by beginning investors, and even experienced ones can do quite well without ever using margin.

5. Using your brokerage's app can be dangerous
These days, many brokerages offer handy apps that let you check your account balances and place trades, among other options, on your smartphone. That's a great selling point for some, but be careful if you use these apps (or any apps tied to your financial accounts). You don't want your precious financial accounts tampered with, such as if hackers intercept and store your account numbers and passwords. Information traveling across an unsecured network can be captured by someone with bad intentions. If you're out and about, be sure to connect through a secure network. A good tip is that if you must access your financial accounts on a smartphone via a dubious network, head to the brokerage's website, not its app. With the website, you can look for the "https://" designation in the URL to assure you that your information is encrypted. The Department of Homeland Security offers a lot of good advice about staying safe online

6. Not all brokerages are alike -- choose carefully
As you select the best brokerage for yourself, consider a variety of factors. Don't just look for the lowest trading commission, especially if you trade infrequently. You might prefer a company that has brick-and-mortar locations near you, for example, or one that offers more mutual funds than most others. You might want banking services to be offered, or you might favor the stock research reports offered by one brokerage over those of another. You might want financial planning assistance, too, or mobile access. Compare brokerages based on whichever factors are most important to you.

7. It's easy to move your brokerage account to a different brokerage
If you have a brokerage account now and wish you were doing business with a different brokerage, fret not: Transferring your account to a different brokerage is not the biggest hassle, and the new brokerage will be happy to do much of the work for you. Just contact the brokerage or find the relevant forms on its website. You won't have to sell all your holdings, and your cost bases won't change, either. Some brokerages charge modest account-transfer fees, while others absorb all costs in order to get you in the door.

Knowing more about your brokerage account can help you determine whether you're using the brokerage that best serves your needs. Spend a little time doing your homework, and you might end up saving hundreds or thousands of dollars. 

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Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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