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Finance 101: What is a Brokerage Account?

When you are researching ways to increase your money, there are so many options to choose from. You can put your money in a time deposit and let it earn through the interest rates. You can buy stock and bonds if you are willing to dabble on high risk investments. And you can also consider a brokerage investment.

If this is the first time you have encountered the term ‘brokerage’ then you must know that it involves mutual bonds, stocks, and mutual funds — buying and selling them for the right price.

Here are the two most crucial steps to know before you open your own brokerage account:

Define a brokerage account

This might be a no-brainer to most people, but defining what a brokerage account is more important that it seems. A lot of people just sprawl into creating a brokerage account without enough knowledge about it, and they end up losing most of their investments as a result of their impulsivity.

A brokerage account is a taxable investment that any person can open with a stock brokerage firm — you can put money in that account through bank deposits, wire transfers, or by writing a check, similar to how normal bank accounts work. These accounts will usually hold these types of investments:

  • Common Stocks
  • Preferred Stocks
  • Bonds
  • Stock Options and Derivatives
  • Real Estate Investment Trusts
  • Exchange Traded Funds
  • Mutual Funds

When utilized correctly, a brokerage account is an extremely efficient investment vehicle for people looking to grow their funds.

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Find out what brokerage account type you need

When opening a brokerage account, one always has to ask himself: what am I saving up for? What are my investment objectives and how can I make sure that I will maximise all the money I will shell in?

There are typically two types of investment accounts- cash brokerage accounts and margin brokerage accounts. The main difference between the two is that cash accounts will require the account holder to deposit cash and securities, while margin accounts allow holders to borrow against assets to purchase investments. The brokerage firm usually gives you a low-interest loan which you can pay at a later time.

Do note that you should consult with a financial expert before attempting to create a margin brokerage account, since these investments lead to financial disasters when not taking caution. A lot of people have lost a huge chunk of their personal savings, and some even their net worth after repeatedly borrowing money for the purchase of stock investments.

 Choose the right brokerage provider

Once you have figured out what type of account is right for you, now is the time to choose the account provider.

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Note that when you compare brokerage providers, check ones with low account minimum and no account fees. Next, you must know the charges for each kind of brokerage investment. For instance, if you choose mutual funds, choose a provider that offers no transaction fee and commission free exchange traded funds. The important thing about investing is reading up on what you need to prepare and properly evaluate your financial capacity to invest. Like any investment, it requires you to focus on knowing when to put your money in, and with brokerage, when to sell it to earn a sizeable amount. Consult with your chosen brokerage provider and discuss strategies that fit your financial capacity.

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