Brokerage Account - Explained
What is a Brockerage Account?
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Table of ContentsWhat is a Brokerage Account?How Does a Brokerage Account Work?Types of Brokerage AccountsFull-service brokerage account Discount brokerage account Online brokerage accounts Cash brokerage account Margin brokerage account The types of investments that a brokerage account can tradeConclusionAcademic Research on Brokerage Account
What is a Brokerage Account?
A brokerage account is a taxable account that an investor opens under a certified brokerage firm for investment purposes. The investor can deposit money by writing checks or linking the account to their savings account. The brokerage firm then trades in the market on behalf of the investor. While the brokerage firm executes trade orders, all the assets acquired belong to the investor. The investor can claim any financial gains that are incurring from the account as a taxable income. The investor then pays the firm a commission for buying and selling of investments.
How Does a Brokerage Account Work?
The different types of brokerage accounts give investors a chance to choose the best model according to their financial needs. An investor can own multiple brokerage accounts since there are no limits. Money transfers from one brokerage firm to another are also an option for the investor. Full-service brokers are brokers who give investment advice to investors and charge quite high guidance fees. However, some online brokers ensure the investors get a secure platform to trade in the market. They charge lower fees for their services. Brokerage accounts differ in various aspects. The aspects include analytical tools, the scope of assets in the market, the execution speed of assets, and how far investors are willing to trade.
Types of Brokerage Accounts
Full-service brokerage account
Refer to an account that allows an investor to get the expert advice of financial advisors. The investor pays the advisor for helping in the development of investment plans and transaction execution in the market. The accounts can either charge the client an advisory fee or cut a commission on any assets the client trades in the market. Regardless of profits or losses in the trade, the investor must pay the commission fee or advisory fee. The brokers annual charges are a flat rate that ranges from 0.5% to 1.5% on the amount in the investors account. Once this happens, the broker charges no commission on the assets the investor buys or sells.
Discount brokerage account
The do-it-yourself traders use the discount accounts as they offer few advisory services at a much lower fee. The account best suits traders who want to invest at a low cost using online trading software.
Online brokerage accounts
An online brokerage is an investment account for investors who decide to do trading of assets on their own. The online brokerage firm allows the client to open an account, then buy and sell assets through their website. Online accounts are the best choice for new investors. Account opening follows the following procedure;
- The client chooses the type of brokerage account they will need. The investor should think of their investment style before choosing a broker. Online brokers are self-directed with tools to help choose trading strategies
- Consider the costs of any features they may want on the account. The client needs to be cautious when choosing free trades since their price improvements are usually zero to none
- Select the brokerage firm that best fits their financial needs. If the client wants to stay in the market for long and make money, choose the assets that they can best trade
- Start the online application after settling on the broker they want. The client then provides their details such as date of birth, employment status, social security number, and physical address.
- Deposit money in the account so that they can start investing. The best option is to link their brokerage account to the bank account
Cash brokerage account
A cash brokerage is a brokerage account that requires the investor to pay for the securities they want to purchase in full amounts. The investor is only allowed to trade with exact amounts. They cannot borrow money from the brokerage firm or the broker. A cash account restricts the trader as they cannot purchase the new stock if a prior transaction is pending. It also does not allow the investor to withdraw funds until they settle the payments. On the brighter side, a cash account is not risky for the investor.
Margin brokerage account
A margin account gives the investor the chance to borrow money from their brokers or brokerage firm if their investment capital isn't enough. It gives the investor the flexibility in making trades. The downside of this type of account is that it has a high margin rate for repayment of the loan. If the investor is unable to repay, the firm can sell its securities without to cover the balance.
The types of investments that a brokerage account can trade
An investor can buy and sell a lot of investments inside a brokerage account, including:
- Common stocks, which are representations of stakeholders shares in a business
- Bonds such as corporate bonds, agency bonds, Treasury bonds, bills, and notes, and municipal bonds
- Preferred stocks that pay higher dividends instead of cuts from the firms profits
- Real Estate Investment Trusts
- Stock options which include put options and call options. They allow the investor to make a trading choice before the option expires
- Master limited partnerships usually have tax advantages to investors.
Many brokerage account options are available in the market today, making investing affordable, and accessible. You only require a little amount of money to start you off to learn how to trade in large markets. You will grow and have lots of investments in no time.
Academic Research on Brokerage Account
- Are individual investors tax savvy? Evidence from retail and discount brokerage accounts, Barber, B. M., & Odean, T. (2004). Are individual investors tax savvy? Evidence from retail and discount brokerage accounts.Journal of Public Economics,88(1-2), 419-442. Using brokerage account data, we analyze the tax awareness of individual investors. We find strong evidence that taxes matter: investors prefer to locate bonds and mutual funds in retirement accounts and, in December, harvest stock losses in their taxable accounts. However, investors also trade actively in their taxable accounts, realize gains more frequently than losses, and locate a material portion of their bonds in taxable accounts. Though taxes leave clear footprints in the data we analyze, many investors could improve their after-tax performance by fully capitalizing on the tax avoidance strategies available to equities, while optimally locating their assets.
- Segmenting a national account, Tutton, M. (1987). Segmenting a national account.Business Horizons,30(1), 61-68. Many of today's large national accounts are so complex and diverse that they should be segmented and approached more as an entire market than as a single customer. A case in point is AT&T's experience with a multinational conglomerate.
- Satisfaction drivers for Internet service technology among stock brokerage customers in Thailand, Srijumpa, R., Speece, M., & Paul, H. (2002). Satisfaction drivers for Internet service technology among stock brokerage customers in Thailand.Journal of Financial Services Marketing,6(3), 240-253. Many financial services firms are offering the Internet as a self-service technology (SST), for online stock trading, in an effort to increase effciency and give customers greater access. It is important to understand how this technology will influence customer satisfaction. This paper reports results of exploratory research to identify sources of customer satisfaction and dissatisfaction with the service encounter in Thai stockbrokerage firms. Results show that customers and service providers determine sources of customer dis/satisfaction differently, depending on whether the service encounter is technology-based or interpersonal. Different customer profiles give rise to segmentation in response to the use of Internet technology in this industry.
- The addictiveness of online brokerage services: A first person account, Team, D., & Turner, N. E. (2011). The addictiveness of online brokerage services: A first person account.Journal of Gambling Issues, (25), 113-129. In the story below, David describes the personal challenges he has faced in controlling his on-line stock market investing. Following David's account, Nigel Turner presents some general observations that tie David's story to the research literature on problem gambling. The viewpoints in David and Nigel's sections reflect the ideas and opinions of their respective author-although this account is collaborative, both authors worked independently and take credit only for their contribution1.
- Is the Cash Management Account Innovative Brokerage or Unlawful Competition for Smaller Banks, Karr, F. H. (1979). Is the Cash Management Account Innovative Brokerage or Unlawful Competition for Smaller Banks.Banking LJ,96, 301.