What Are Brokerage Accounts?

What are brokerage accounts? This is a question most, if not all, first-time investors ask of themselves and of others for good reasons, too. Keep in mind that entering into investments regardless of its form should not be taken lightly. Brokers and brokerage accounts are often the best ways to become a seasoned investor from the possibly greenhorn investor you are now.

Let's start with the definition of a brokerage account. Basically, this is a professional arrangement between an individual investor and a legitimate brokerage firm. The contract calls for the investor to deposit funds with the firm for the purpose of investments in various market securities. The brokerage firm places investment orders in behalf of the investor with the understanding that any and all profits and losses made on the investment shall accrue to the investor alone. In short, the initial capital and changes to it made by virtue of the investment transactions are the assets of the investor, not the brokerage firm and the broker in charge of the brokerage account.

So, where does the brokerage firm benefit from the arrangement? The firm charges trading fees for the transactions, commissions on profits made, and other account maintenance fees as necessary. These fees become part of the brokerage firm's profit.

These fees vary greatly from one brokerage firm to the next. The trading fee may be a flat fee imposed on all trading transactions regardless of the amount being traded. It may also be based on a tiered value of the traded amount, say, $7.99 for every $1,000-shares traded with the rates going up within specific increments. This is just an example so it is best to ask the broker about the trading fees and commissions imposed by the firm.

The account maintenance and other service fees also vary. You will find firms that charge a certain amount of dollars for inactive account or for accounts falling below the minimum. You will also find firms that are more generous with their terms - no such fees imposed.

The fees will also depend on the type of investment brokerage services being offered. On one hand, you have the discount broker where the investors make all the investment decisions with no advice coming from the brokers and, thus, charge less on the fees. Ameritrade, E-Trade Financial and TD Waterhouse are the best known discount brokers in the industry.

On the other hand, you have the full service brokerage firms that offer all the useful bells and whistles of investment planning and management for their clients. Of course, the investment money required and the fees are on the higher end of the spectrum.

We can mention Charles Schwab and Merrill Lynch as brokerage firms that offer both types of services. It's your choice as to which account is the best for your wealth-building capacity and goals.

So, before you plunge into the world of investments, ask yourself the question of: What are brokerage accounts? Your next questions like what are their advantages, how to pick your stock broker and what are the methods to take full advantage of their services will soon follow - and all of the answers to these questions will be to your benefit. So, just ask and the answers will be given.