What Is a Brokerage Account and How Does It Work?

A brokerage account is a type of financial account that allows you to buy and sell investments like stocks, bonds, mutual funds, ETFs, and more. It acts as a gateway between you and the financial markets, helping you build wealth, generate income, or save for long-term goals like retirement, a house, or your child’s education.

If you're looking to take control of your money, diversify your assets, or get started with investing, a brokerage account is the foundation. In this guide, we'll break down what a brokerage account is, how it works, the different types available, and how to choose the best one for your needs.

What Is a Brokerage Account and How Does It Work?

What Can You Do With a Brokerage Account?

At its core, a brokerage account gives you access to investment products that banks and savings accounts typically don’t. Once you fund your account, you can use the cash to:

●      Buy and sell stocks (ownership in individual companies)

●      Invest in ETFs (baskets of assets that track indexes or themes)

●      Build a diversified portfolio of mutual funds

●      Purchase bonds for fixed income

●      Trade options or futures (advanced strategies)

●      Access cryptocurrency (with some modern brokers)

Unlike retirement-specific accounts like a Roth IRA or 401(k), a brokerage account offers flexibility. You can invest and withdraw money at any time, although you may be subject to taxes on gains or dividends.

Types of Brokerage Accounts

1. Taxable Brokerage Account

This is the most common type. It lets you buy and sell securities with no contribution limits or withdrawal restrictions. However, you’ll pay capital gains tax on profits and income tax on dividends.

2. Retirement Brokerage Account

Retirement-focused accounts like Traditional IRAs and Roth IRAs are also opened through a brokerage. These accounts come with tax advantages but are designed for long-term investing. Contributions may be tax-deductible or grow tax-free depending on the account type.

3. Margin Account

This type allows you to borrow money from the brokerage to buy more securities than you could with your own cash. It's a high-risk strategy used for leveraged investing. Margin accounts come with interest charges and the potential for margin calls.

4. Custodial Account

A custodial brokerage account is opened by an adult for a minor. The assets belong to the child, but the adult manages the account until the child reaches a certain age (usually 18 or 21, depending on state law).

5. Joint Brokerage Account

These are opened by two or more individuals, often spouses. All owners have equal access, and the account may include survivorship rights (meaning assets transfer directly to the surviving owner).

How to Open a Brokerage Account

Opening a brokerage account today is easier than ever. Most platforms offer an entirely digital application process that takes less than 15 minutes. Here’s what to expect:

1.     Choose a broker (e.g., Fidelity, Charles Schwab, Vanguard, Robinhood, or E*TRADE)

2.     Submit personal details like your name, address, Social Security number, employment info, and income

3.     Pick the type of account (individual, joint, IRA, etc.)

4.     Fund your account by linking a bank account

5.     Start investing

Most platforms require no minimum deposit. Some offer fractional shares, letting you invest with as little as $1.

How Brokerage Accounts Make Money for You

A brokerage account allows your money to grow over time through:

●      Capital appreciation: When the value of your investments increases

●      Dividends: Regular payouts from companies or funds

●      Compound growth: Reinvesting earnings to grow faster

Unlike savings accounts, which offer modest interest, brokerage accounts expose your money to market gains. While there’s risk involved, historically, the stock market has averaged 7% to 10% annual returns over the long run.

Risks and Considerations

Investing through a brokerage account involves risk. Markets can go up or down, and there's no guarantee of profit. Key risks include:

●      Market volatility

●      Loss of principal

●      Tax implications

●      Emotional investing (panic selling or greedy buying)

To manage risk, many investors use strategies like diversification, dollar-cost averaging, and rebalancing.

Choosing the Right Brokerage Platform

When selecting a brokerage, consider:

●      Fees: Most brokers now offer $0 commissions for stocks and ETFs. Still, watch for hidden fees.

●      Investment options: Ensure your broker offers the assets you want (stocks, ETFs, crypto, etc.)

●      Platform ease-of-use: Apps like Robinhood are user-friendly, while platforms like TD Ameritrade offer more tools.

●      Research and tools: Some brokers provide stock screeners, reports, and educational content.

●      Customer support: Look for 24/7 service if you're a beginner or frequent trader.

Popular brokers for beginners: Robinhood, SoFi, Charles Schwab

Best for long-term investors: Fidelity, Vanguard

Best for active traders: TD Ameritrade, Interactive Brokers

Tax Implications of a Brokerage Account

With a taxable brokerage account, you’ll deal with:

●      Short-term capital gains (investments held <1 year, taxed as ordinary income)

●      Long-term capital gains (investments held >1 year, taxed at 0%, 15%, or 20%)

●      Qualified vs. non-qualified dividends

●      Form 1099 from your broker at tax time

It's important to keep accurate records and consider strategies like tax-loss harvesting to offset gains.

How to Use a Brokerage Account for Retirement

Even though a taxable brokerage doesn’t have tax perks like a 401(k) or IRA, it can still be part of your retirement strategy. Use it to:

●      Invest beyond your tax-advantaged account limits

●      Build a bridge account for early retirement access

●      Create tax-diversified retirement income (mix of taxable, tax-deferred, and tax-free accounts)

A diversified mix of accounts helps reduce your future tax burden.

Active vs. Passive Investing

When using a brokerage account, your approach to investing matters.

Active investors pick individual stocks and monitor them closely.

Passive investors prefer index funds or ETFs that track the market.

Research shows that passive investing often beats active management over time due to lower fees and less emotional trading. Platforms like Fidelity and Vanguard specialize in low-cost index funds ideal for long-term passive growth.

Using Brokerage Accounts for College Savings

While brokerage accounts aren’t specifically designed to provide tax advantages for education savings like a 529 Plan, they offer unmatched flexibility. This makes them a viable option for parents, guardians, or even relatives who want to save and invest money for a child’s future without the restrictions that come with more specialized accounts.

Unlike a 529 Plan, which limits how funds can be used (typically only for qualified education expenses), a standard taxable brokerage account allows you to invest and withdraw money for any purpose. This includes—but isn’t limited to—major educational milestones and lifestyle opportunities that don’t fall under the IRS’s strict definition of “qualified education costs.”

For example, funds from a brokerage account can be used to cover college tuition at public or private institutions. But you also have the flexibility to use that money for student housing, whether on-campus or off-campus. If your child or teen decides to pursue entrepreneurship instead of a traditional college path, the account can provide seed capital for launching a business. Or, if they want to take a gap year to travel, intern, or gain life experience, a brokerage account gives you the freedom to support that journey without penalty or restrictions.

The tradeoff, of course, is taxes. A brokerage account is subject to capital gains taxes when you sell investments for a profit. This applies whether you use the funds for education or anything else. Short-term gains (for assets held less than a year) are taxed at your ordinary income rate, while long-term gains are taxed at 0%, 15%, or 20% depending on your income level.

Still, many investors accept this tax exposure in exchange for the freedom to use the money however they wish. Additionally, if you start investing early and take advantage of long-term market growth, the compounding returns can significantly outweigh the tax costs over time.

In summary, brokerage accounts may not offer tax breaks like a 529 Plan, but they give you the freedom to fund any version of your child’s future—education, business, travel, or otherwise—on your own terms.

Brokerage Account vs. Bank Account

Here’s how they compare:

FeatureBrokerage AccountBank AccountPurposeInvestingSaving & spendingRiskMarket riskFDIC insuredReturn PotentialHigh (long-term)Low (currently ~0.5%–4%)AccessImmediate but subject to sale timingImmediateTaxationCapital gains/dividendsNone on interest income under threshold

The bottom line: banks are for safety, brokerage accounts are for growth.

Popular Uses for Brokerage Accounts in 2025

In today’s market, investors are using brokerage accounts for more than just stocks:

●      Crypto exposure through brokers like Robinhood and Fidelity

●      Options trading for advanced strategies

●      Real estate investment trusts (REITs) for passive property exposure

●      Sustainable investing in ESG-focused ETFs

●      Thematic investing in trends like AI, green energy, and healthcare

Modern brokers make it easy to invest in sectors that match your values or convictions.

The Role of Robo-Advisors

If managing your own portfolio sounds overwhelming, robo-advisors like Betterment, Wealthfront, and Schwab Intelligent Portfolios automate investing. They:

●      Build diversified portfolios

●      Automatically rebalance

●      Offer tax-loss harvesting

●      Adjust risk based on your goals

Most charge low annual fees (around 0.25%) and are ideal for hands-off investors.

Why Everyone Should Consider a Brokerage Account

A brokerage account is a powerful tool for building wealth and investing for your goals. Whether you're saving for retirement, education, or diversifying your assets, it’s the first step to growing your money.

Interested in getting started? Open your brokerage account today and start investing with ease. Have questions? Contact us for personalized advice to help you make the best choices for your financial journey!