What to Invest in with a Brokerage Account
Short answer
A brokerage account lets you invest in stocks, bonds, mutual funds, ETFs, and other securities, giving you a way to grow your money over time. Start by choosing investments based on your goals and risk tolerance, then buy shares or bonds through your brokerage platform. This hands-on approach helps you build wealth beyond traditional savings.
What is a brokerage account in simple terms?
A brokerage account is a type of financial account you open with a brokerage firm to buy and sell investments like stocks and bonds. Think of it as a digital storefront where you can purchase pieces of companies or other financial products. Unlike a savings account, which just holds your money, a brokerage account allows your money to work for you by investing it in assets that may increase in value or pay dividends.
You fund the account by transferring money from your bank, then use that money to buy investment products. The brokerage acts as the middleman, executing buy and sell orders on your behalf. Unlike retirement accounts like IRAs, brokerage accounts have no contribution limits or withdrawal restrictions, making them flexible for short- or long-term investing.
How does investing through a brokerage account work?
Once your account is set up and funded, you decide what to invest in. For example, if you deposit $1,000, you could buy 10 shares of a stock priced at $100 each. Over time, if the stock price rises to $120, your investment is worth $1,200 — a $200 gain. If the stock pays dividends, you might receive cash payments during the year.
You place orders through the brokerage’s website or app, choosing “market order” (buy/sell immediately at current price) or “limit order” (set a price at which you want to buy/sell). The brokerage charges fees or commissions depending on the firm, though many now offer commission-free trades for stocks and ETFs.
Why should everyday people care about brokerage accounts?
Brokerage accounts open doors to growing your wealth by investing in the financial markets. Money kept only in savings accounts often grows slowly because of low interest rates. Investing through a brokerage can potentially yield higher returns over time, helping you reach goals like buying a home, funding education, or building retirement savings.
For beginners, brokerage accounts offer flexibility — no required minimum deposits or withdrawal penalties. You control what you invest in, how much, and when to sell. This makes brokerage accounts a practical tool to supplement other savings and retirement plans.
What kinds of investments can you hold in a brokerage account?
A brokerage account can hold a wide range of investments:
- Stocks: Shares of ownership in companies.
- Bonds: Loans to governments or corporations that pay interest.
- Exchange-Traded Funds (ETFs): Collections of stocks or bonds traded like stocks.
- Mutual Funds: Professionally managed investment pools.
- Options and other derivatives: Contracts that give rights to buy or sell assets.
- Cash or money market funds: For short-term holding and liquidity.
Each type has different risk levels, expected returns, and investment horizons. Stocks tend to offer higher growth potential but come with more volatility, while bonds provide more stability but lower returns. ETFs and mutual funds offer diversification by bundling many securities together.
How much should you invest through a brokerage account?
The amount to invest depends on your financial situation, goals, and risk tolerance. Start by ensuring you have an emergency fund covering 3-6 months of expenses. Then, decide how much money you can comfortably set aside for investing without needing it soon.
For example, if you earn $3,000 a month and can save $300 monthly after expenses, you might start by investing $100 to $200 monthly in a brokerage account and keep some cash for flexibility. You can also make lump-sum investments when you have extra funds.
It’s better to invest regularly over time than to try to time the market with large sums. Many brokerages allow you to buy fractional shares, so you don’t need to meet high stock prices to start investing.
What common terms do people confuse with brokerage accounts?
People often mix up brokerage accounts with:
- Investment accounts: A broader term that includes brokerage accounts and retirement accounts like IRAs.
- Retirement accounts: Such as 401(k) or IRA accounts, which have tax advantages but limits.
- Savings accounts: Bank accounts focused on storing money with lower risk and lower returns.
- Checking accounts: For daily spending, not investing.
Knowing these distinctions helps you choose the right account for your needs. For example, a brokerage account is best when you want flexible investing, while retirement accounts focus on tax benefits for long-term saving.
What steps should you take next to start investing with a brokerage account?
- Choose a brokerage firm: Look for low fees, easy-to-use platforms, and good customer service. Some popular options cater to beginners.
- Open and fund your account: Provide personal information, link your bank account, and transfer money.
- Set your investment goals: Decide if you’re investing for growth, income, or a specific goal.
- Learn about investment options: Research stocks, bonds, ETFs, and mutual funds.
- Start investing: Begin with amounts you’re comfortable with, using market or limit orders.
- Monitor and adjust: Review your portfolio periodically and rebalance as needed.
Many brokerages offer educational resources to help you understand investing basics and build confidence.
How do brokerage accounts compare to other financial accounts?
Comparing brokerage accounts to savings or retirement accounts clarifies their purpose. Savings accounts are for safe, liquid money with minimal growth. Brokerage accounts provide a way to invest and grow money but come with risk. Retirement accounts provide tax advantages but limit access. Understanding these differences assists in aligning accounts with your financial plan.
For more on account types, see articles on Brokerage Account vs Investment Account and Brokerage Account for Beginners: How to Get Started.
Frequently asked questions
Can I lose money in a brokerage account?
Yes, investing always carries risk, including losing some or all your invested money. Prices of stocks and bonds can go down as well as up. Unlike savings accounts, brokerage accounts are not insured by the FDIC, so it’s important to invest wisely and diversify.
Do I need a lot of money to open a brokerage account?
Most brokerages have no minimum deposit requirement, allowing you to start with as little as $1, especially if they offer fractional shares. Start with what you can afford and increase your investment over time.
How do I choose what stocks or funds to buy in my brokerage account?
Consider your investment goals, risk tolerance, and time horizon. Research companies or funds’ performance, fees, and strategies. Many beginners start with ETFs or mutual funds for diversification.
Are there fees for using a brokerage account?
Some brokerages charge commissions for trades or account maintenance fees, but many now offer commission-free trades for stocks and ETFs. Always check the fee schedule of your brokerage before investing.
How is a brokerage account different from a 401(k)?
A 401(k) is a retirement account sponsored by employers with tax advantages and contribution limits. A brokerage account has no tax advantages or limits but offers more flexibility in accessing funds and investment choices.