What is a Brokerage Account? Where and how to open online brokerage account for investing or IRA for beginner in 2019.

What is a Brokerage Account?

If you are brand new to investing, or are hearing about investing for the first time, you may be wondering what a brokerage account is. A brokerage account is a simple arrangement where a brokerage firm makes an agreement with you, the investor, to open an account for you in which you can deposit funds and trade various financial securities. The brokerage acts as the middle man, routing your orders to the market makers and keeping track of your positions for you, generally on a commission basis. This article will offer a detailed overview of different types of brokerage accounts and brokers.

How Does the Investor/Broker Arrangement Work?

Every brokerage firm has different terms, but in general they act as your connection to the financial markets. They find counterparties willing to fill your trade orders and keep track of your account balances and positions for you.

Getting Paid

Brokers generally don’t offer these services for free (although some actually do!); they often play the intermediary in return for commission payments on each trade (Ameritrade charges $6.95 for most trades, for example) or a flat or % monthly account fee. Some brokers, like Robinhood and Firstrade, offer free basic accounts where you won’t pay any commissions or account fees at all, however understandably, the extra services (which we’ll get into next) at these brokers tend to be lacking.

More than Just an Intermediary

Most brokers can be divided up into one of two groups – discount brokers and full-service brokers. A discount broker is one who acts purely as a financial intermediary, connecting you to the market participants willing to take the opposite side of your trade, and not much more. These brokers, like Robinhood, have the lowest commissions and fees (and may not have any costs at all) because their service models and trading platforms are not expensive to maintain. They usually offer only the most basic of services and stock information on their platforms, such as stock charts, price information, and company headlines.

On the opposite end of the spectrum, you have full-service brokerage firms, such as Merrill Lynch, which do all of the above and so much more. They offer a robust platform full of stock details, valuation metrics, research reports, stock screeners, and so much more to help you identify and research investments for your portfolio – their websites serve as a one-stop shop for all the investing information you need.

Additionally, these full-service brokers take the business a step further and offer advisory services to their clients where they will get to know you, design a custom portfolio for you, and even manage it on your behalf. As you might expect, a full-service broker is also going to cost you more (all those extra services and investment personnel are not free!). Most full-service brokers that manage your portfolio for you will charge a fee as percentage of your assets, generally between 0.5% and 1.5%.

You even have some brokerage firms that fall somewhat in the middle of being discount and full-service. These brokerages often have modest commission schedules, a decent amount of investment data, and the option to pay a small advisory fee (~0.30%) for portfolio planning and management services provided via robo advisors. Next, we’ll offer a couple examples of popular brokerage firms and their services.

TD Ameritrade

TD Ameritrade would fall somewhere in the middle of a discount and full-service brokerage firm, probably closer to the full-service side. They don’t have any account maintenance fees, but they do charge a flat $6.95 for most equity trades, although they have a large list of commission-free ETFs. They offer a wide variety of asset types that you can trade, including stocks, ETFs, options, mutual funds, bonds, and forex.


Ameritrade Brokerage Account


They have a robust and very popular trading platform called Thinkorswim, and offer most of the investment information you would need to conduct your due diligence and research, including company research reports, financial statements, market headlines, valuation metrics, exposures, and financial ratios. They have some really great screens as well to sift through their thousands of mutual funds, ETFs, and stocks based on a variety of criteria.

TD Ameritrade also ventures close to the full-service side of the broker spectrum because of their robo advisory service called “Essential Portfolios”. This service will use your answers to a series of personal financial questions (about your investing goals and risk appetite) to build you a customized portfolio of ETFs. Ameritrade will then manage and rebalance it for you as needed, and for this service you will pay a 0.30% advisory fee. Learn more...

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Firstrade

Firstrade is another popular brokerage firm, and they would be most appropriately classified as a discount broker because of their focus on offering a low-cost account. They do not charge any commissions for most security types or account maintenance fees. They offer a good variety of asset types with no commissions, including stocks, ETFs, mutual funds, and options. They also offer some fixed income investments for a small commission charge.


FirstTrade Brokerage Account


Their website-based trading platform is not as robust or popular as TD Ameritrade’s Thinkorswim, but it’s hard to complain when you’re trading for free. But considering that trading with Firstrade is free, we were surprised by some of the nice research tools they offer, including stock, ETF, and mutual fund screening tools. Firstrade doesn’t offer any robo advisory service, which is not expected of a discount broker. Learn more...

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Brokerage Account Summary

To summarize, a brokerage account is simply your connection to the financial markets. There are many brokerage firms out there with a variety of different levels of services, features, and pricing structures. All of them would love to have your business, but it’s up to you to decide which type of broker suits your needs the best.


Firstrade

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