What Is a Brokerage Account? How It Works, Types, and Next Steps

What is a brokerage account?

A brokerage account holds and trades investment assets, such as stocks, mutual funds, exchange-traded funds (ETFs), bonds, certificates of deposit (CDs), and cash.

Unlike 401(k)s, individual retirement accounts (IRAs), and 529 plans, brokerage accounts don’t come with tax advantages or withdrawal restrictions. You fund them with after-tax dollars, and you can access your money at any time.

How brokerage accounts are taxed

Because brokerage accounts aren’t tax-advantaged, you generally pay taxes each year on taxable activity, including:

• Capital gains when you sell investments for a profit
• Dividends paid by stocks or funds
• Interest earned on cash or fixed-income investments

Your broker will track this activity and send you the appropriate tax forms (such as a 1099) after the end of the year to help with filing.

Types of brokerage accounts: cash vs. margin

There are two primary types of brokerage accounts: cash and margin.

Cash account

In a cash account, all purchases are paid for with money you already have in the account. When you sell an investment, the proceeds typically take a couple of days to settle before they can be reused. You can only sell investments you own outright.

Margin account

A margin account allows you to borrow money from your broker to invest, using your existing investments as collateral. This can increase both gains and losses. If the value of your account falls too far, the broker may require you to deposit more money or sell assets (a situation known as a margin call).

Margin accounts offer more flexibility and advanced trading options, but they carry higher risk and aren’t a good fit for many beginners.

How to choose a brokerage account

One of the most important decisions you’ll make is how much support you want from your brokerage. Most accounts fall into one of three service levels.

1. Self-service accounts are available through discount brokerages. You'll pay low or no trading fees or account fees. You will manage the stock portfolio, and all trades yourself. The broker may provide you with access to tools for research and analysis, such as stock and fund screeners.
2. Automated accounts, known as robo-advisor accounts, manage your portfolio with predetermined rules that align with your risk tolerance and investment timeline. You fund the account, and the trades are made automatically. You likely don't have free access to a financial advisor for questions and concerns. A typical annual fee for a robo-advisor account would be 0.25% of your balance. That works out to $2.50 for every $1,000 you have invested.
3. Full-service accounts come with a human financial advisor who can develop a personalized investment plan that fits your needs and situation. You may pay trading fees or an annual, percentage-based account fee of 1% to 1.5% of your account balance. Note that per-trade fee structures compensate your broker for higher-frequency trading. Percentage-based account fees reward the broker when your net worth increases.

Beyond service level, there are several other factors to consider in choosing the right account, such as:

• Account and transaction fees
• Support for fractional investing
• Ability to set up recurring investments or dollar-cost averaging
• Ease of transferring money in and out
• Quality of tools, research, and educational content
• How uninvested cash is handled

A quick shortcut if you’re comparing options

If you’d rather skip straight to vetted platforms, we maintain a regularly updated list of the best brokerage accounts, highlighting options for beginners, hands-off investors, and more active traders. It’s a helpful starting point once you know what features matter most to you.

For a deeper breakdown of what to compare, and how priorities change as you gain experience, see our full guide on how to choose a brokerage account.

Opening a brokerage account

Opening a brokerage account is like opening a bank account. Often, you can complete the process online in less than 20 minutes. You'll start by providing various pieces of personal information, such as:

• Your legal name and date of birth
• Social Security number or taxpayer ID
• Address and contact information
• Government-issued ID details
• Employment status and income
• Net worth and investment goals

The broker will also ask you to choose between a cash account or a margin account. Be careful here. According to the Securities and Exchange Commission (SEC), many brokers default this option to the margin account. Make sure you're opening the account type you want.

If you want a step-by-step walkthrough of the full process, including what happens after you apply and how long funding usually takes, see our guide on how to open a brokerage account.

Using your brokerage account

Once your account is funded, you can begin investing. If you’re using a self-directed account, it’s worth thinking through a few basics before placing your first trade.

Set a budget

Only invest money you don’t expect to need in the near term. Many investors use brokerage accounts for goals that are at least five years away.

Understand your risk tolerance

Market swings are normal. If a sharp drop in your account balance would cause stress, lean toward lower-volatility investments. If you’re comfortable with ups and downs, you may choose to allocate some money to higher-risk assets.

Match investments to your timeline

Longer timelines generally allow for more risk. Shorter timelines often call for a more conservative approach.

Consider your time commitment

Managing individual stocks takes time and attention. If you prefer a lower-maintenance approach, diversified funds or automated investing may be a better fit.