What is a brokerage account?

Unlike checking or savings accounts, brokerage accounts are the instrument we need to be able to invest in stocks, options, mutual funds and other financial products.

In brokerage accounts we will deposit the money we want to use to invest, and once deposited we can buy and sell stocks, ETFs, funds or bonds.

These accounts can be used for short term or long term investments, and in some accounts it is even possible to obtain a return on the uninvested money deposited in the account.

We can contract an online brokerage account through a broker or a bank, generally at no cost and with no minimum amount. Money can be withdrawn at any time the client wishes.

Margin account vs. cash account

There are two main types of brokerage accounts: cash accounts and margin accounts. The difference between them is how you buy your investments.

What is a cash brokerage account?

When you have a cash account at a brokerage firm, you buy securities with the money deposited in the account. If you have $1,000, you can only buy $1,000 worth of stocks, i.e. you can only invest the money you have in the account. If you have no more money in your brokerage account you cannot buy additional securities.

The cash account is the normal account for small investors and for those who are just starting to invest in stocks.

What is a margin brokerage account?

With a margin account, you can borrow money to buy stocks, and the investments themselves are collateral for the loan. If you have $1,000, you could buy more than $1,000 worth of stock.

The broker will give you a loan so you can buy additional shares. You have to pay interest on the loan, but it is an internal loan, inside your account.

For example, if our margin account allows us to borrow the same amount of money we have invested in stocks, with the collateral of those stocks, we can borrow $1,000 for every $1,000 invested, so we can invest double the money we have.

A margin account allows you to execute more complex trading strategies, such as short sales, but there are risks in using debt instead of cash to invest.

If the value of your investments falls, your broker may ask you to repay your margin debt immediately, this is known as a margin call. The firm also has the right to sell any of the investments in your portfolio, without notice, to cover an account shortfall.

Brokerage account providers

We can sign up for a brokerage account with different types of brokers, depending on their specialization.

Online brokerage account

These are accounts that are contracted to directly manage our investments. From these accounts we buy and sell stocks, ETFs and other investment products. It is the usual way to invest in the stock market, stocks and other products. Investments are based on our decisions.

Among the advantages that are established is that, when opening an account of this type, the user will have access to tools to learn everything they need to make successful investments: websites, software, online platforms, constant training, and access to personalized service at all times.

One of the most popular accounts, as an example, is the TD Ameritrade brokerage account, which has a Spanish-speaking telephone answering service.

Managed Brokerage Account

This type of account has the advantage of being fully managed by an experienced broker.

With a managed brokerage account, the user relinquishes authority over the account to a financial advisor who specializes in that type of account. This advisor, who is usually part of an investment company, will be in charge of making investment decisions autonomously, always with the best interests of the account holder in mind.

Fees on this type of account will be the highest, and the average registered investment advisor will charge an annual fee of 1.17% of your balance.

Robo-advisor accounts

For investors who don't want to deal with investments or people who are new to investing, robo-advisor offer automated management and occasional human assistance.

When you sign up for the account you answer a few questions about your goals, timeline and risk tolerance, and a robo designs a diversified portfolio of low-cost ETFs or mutual funds tailored to your needs. They usually charge fees, but some of the best robo-advisors are free.

What products can I invest in with a brokerage account?

The main product you can invest in from a brokerage account is stocks, you can invest in stocks on the U.S. Stock Market, but the number of products you can invest in is much larger. Each broker allows you to invest in a number of products, but the usual ones are:

• Common or preferred shares, which give investors partial ownership of a company.
• Bonds, including U.S. Treasury securities, savings bonds, corporate bonds, tax-exempt municipal bonds and agency bonds.
• Mutual funds, such as index funds, which are pooled investment portfolios that combine funds from many investors to buy more stocks than the investors could buy on their own.
• Exchange-traded funds (ETFs), which are a type of security that combines elements of stocks and mutual funds.
• Real estate investment trusts (REITs).
• Stock options and other derivatives.
• Cryptocurrencies.
• Master limited partnerships (MLPs), which are complex tax-advantaged partnerships.
• Money markets and certificates of deposit (CDs), which are generally considered safer investments designed to protect cash and earn some income.
• For advanced investors Forex and CFDs.

How to open a brokerage account

You can open a new brokerage account in a matter of minutes over the Internet. Just be prepared to answer a few questions and provide personal information during account set up.

You will need to provide personal information to open a brokerage account, such as:

• A Social Security number or Tax Identification Number.
• A driver's license or passport, or other government-issued identification.
• Information about your employment status.
• Financial information, such as your annual income and net worth.
• A basic overview of your investment objectives.

If you don't know which brokerage account to choose, it's best to start with a free account. You can also go to a comparison site and ask friends. Choose an account that is easy to manage and has low commissions, if you need a more professional brokerage account later on, you will be able to hire one in the future.

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