How to Open a Self Directed Brokerage Account
What's a brokerage account?
A brokerage account is the type of account used to buy and sell securities like stocks, bonds and mutual funds. You can transfer money into and out of a brokerage account much like a bank account, but unlike banks, brokerage accounts give you access to the stock market and other investments.
You'll also see brokerage accounts referred to as taxable accounts, because investment income within a brokerage account is taxed as a capital gain. This is compared with retirement accounts (like IRAs) that have a different set of tax and withdrawal rules, and may be better for retirement savings and investing.
» Ready to compare brokerage accounts? See our roundup of the best online brokers
How do brokerage accounts work?
There are a range of licensed brokerage firms — from pricier full-service stockbrokers to low-fee online discount brokers — where you can set up a brokerage account.
Many brokers allow you to open a brokerage account quickly online, and you generally do not need a lot of money to do so — in fact, many brokerage firms allow you to open an account with no initial deposit. However, you will need to fund the account before you purchase investments. You can do that by transferring money from your checking or savings account, or from another brokerage account. You may also be able to mail in a check.
You own the money and investments in your brokerage account, and you can sell investments at any time. The broker holds your account and acts as an intermediary between you and the investments you want to purchase.
There is no limit on the number of brokerage accounts you can have, or the amount of money you can deposit into a taxable brokerage account each year. There should be no fee to open a brokerage account.
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Brokerage accounts vs. retirement accounts
A standard brokerage account, or taxable account, offers no tax advantages for investing through the account — in most cases, your investment earnings will be taxed. On the plus side, that means there are very few rules for these accounts: You can pull your money out at any time, for any reason, and invest as much as you'd like. (Here are our picks for the best brokerage accounts .)
But if you're investing for retirement, you'll want to open a retirement account rather than a taxable brokerage account. A retirement account, such as a Roth or traditional IRA, is a tax-advantaged investment account specifically designed for your retirement savings. Because of that, unlike taxable brokerage accounts, retirement accounts place restrictions around when and how you can withdraw the money, as well as how much you can contribute each year. (Here are our picks for the best IRA accounts .)
The table below provides a brief overview of how brokerage accounts compare with retirement accounts.
| Brokerage account | Retirement account | |
|---|---|---|
| Taxes | May incur capitals gains tax on investment income | Typically no capital gains; tax-deferred or tax-free growth |
| Contributions | Unlimited | Caps on annual contributions |
| Withdrawals | No limits or penalties | Penalties for withdrawing before a certain age, unless exceptions are met |
| Used primarily for | Stock trading, options trading, additional long-term investments after maxing out retirement accounts | Long-term growth, retirement savings |
Nerd tip: You may already be investing for retirement through your employer — many companies offer an employer-sponsored plan like a 401(k) and match your contributions. You can still open an IRA, but we recommend contributing at least enough to your 401(k) to earn that match first.
How to choose a brokerage account provider
Once you've decided whether you want a retirement account or a taxable brokerage account, you'll want to choose an account provider. There are two main options that meet the needs of most investors: online brokers and robo-advisors . Both offer retirement accounts and taxable brokerage accounts.
Online brokerage account
If you want to purchase and manage your own investments, a brokerage account at an online broker is for you.
An investment account with an online brokerage company enables you to buy and sell investments through the broker's website. Discount brokers offer a range of investments, including stocks, mutual funds and bonds.
Managed brokerage account
A managed brokerage account comes with investment management , either from a human investment advisor or a robo-advisor. A robo-advisor provides a low-cost alternative to hiring a human investment manager: These companies use sophisticated computer algorithms to choose and manage your investments for you, based on your goals and investing timeline.
Robo-advisors are likely a good fit for you if you'd like to be largely hands-off when it comes to your investments. We have a full list of the best robo-advisors .
Note: We don't recommend investing money you need within the next five years. If you're saving for a short-term goal, skip the brokerage or investment account and consider these options for short-term investments .
How to open a brokerage account
Setting up a brokerage account is a simple process — you can typically complete an application online in under 15 minutes. (In most states, you'll need to be 18 to open your own account, but here's how parents can set up a brokerage account for their kids .)
Once you've opened the investment account, you'll need to initiate a deposit or funds transfer. That sounds complicated, but these days, it's a pretty simple process to link your bank account with a brokerage account, and can be done online.
Some brokers may require you to verify a transaction. If that's the case, you'll have to wait until the broker deposits a small sum in your bank account — typically a few cents — and you'll confirm the transaction by letting the brokerage know the exact amount that was deposited. If you have any questions, the broker can walk you through the process. After the transfer is complete and your brokerage account is funded, you can begin investing.
You might be asked if you want a cash account or a margin account . A margin account allows you to borrow money from the broker in order to make trades, but you'll pay interest and it's risky. Generally, it's best to stick with a cash account at first.
Frequently asked questions
The best brokerage accounts for beginners tend to have zero account minimums, excellent customer support and an easy-to-use platform. Of the brokers NerdWallet reviews, TDAmeritrade, InteractiveBrokers, Fidelity and Charles Schwab received the highest marks in our list of the Best Online Brokers for Beginners .
Most brokers don't require an account minimum to get started. So if that's a concern for you, look for a broker that doesn't have one — there are plenty of great options out there that don't require a minimum. Remember, though, that an account minimum is different from an investment minimum. An account minimum is an amount you would need to deposit into the brokerage account just to open it. An investment minimum might be found in an index fund, in which you would have to buy, say, $1,000 in shares to take part in the fund.
Whether you should open an IRA or taxable brokerage account first depends on your situation and investment goals. Financial planners often recommend, first and foremost, to contribute at least enough to a company's 401(k) plan to earn the company's match, if that's a possibility.
If not, then it may make sense to open an IRA before a brokerage account, as IRAs come with considerable tax advantages and are built for long-term growth. If you have an IRA and are already maxing it out, and either don't have access to a 401(k) through work or already contributing enough to at least get your company's match, then a brokerage account could be the next step.
The act of opening a brokerage account doesn't mean you'll be on the hook for any additional taxes. But once you buy stock through a brokerage account, you'll probably have to pay a capital gains tax if you sell it for a profit later.
If the stock or fund you buy through a brokerage account pays dividends, you'll have to pay taxes on those dividends even if you choose to reinvest them. If this is the case, your brokerage will send the relatively uncomplicated DIV-1099 tax form to include in your tax return.
If you invest through a retirement account, you typically won't have to worry about any of this.
There are a few levels to getting money out of your brokerage account. If it's invested in stocks, you'll have to sell those stocks, first. Then, once the money is available as cash in your account (which, these days, happens fairly instantaneously), you'll still likely have to wait a few days before you can withdraw that cash. Once the trade "settles," you can withdraw the cash, which can take another few days for the cash to appear in your bank account.
So, under normal circumstances, there shouldn't be any problem getting cash out of your brokerage account, but keep in mind that it could be several days before it's actually available in your bank account. For brokerages that offer cash management in addition to brokerage services, this process is much faster.
How to Open a Self Directed Brokerage Account
Source: https://www.nerdwallet.com/article/investing/what-is-how-to-open-brokerage-account
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