What Is A Brokerage Account: How Do You Open One?

A brokerage account is crucial for your path to financial growth and investment success. It equips you to confidently navigate the dynamic stock market landscape, making it an essential component of your financial strategy.

Brokerage accounts come in various variations, such as standard, managed, and retirement accounts. Most are taxable investment accounts that you can open with online brokers or robo-advisors.

This blog gives you in-depth information on a brokerage account – what it is, its types, how to open it online, the best brokerage accounts in Australia, and things to consider when opening it.

If you don't have a trading account yet, consider eToro, used by many investors in Australia and worldwide. You can create an eToro trading account HERE.

eToro AUS Capital Ltd ACN 612 791 803 AFSL 491139. OTC Derivatives are speculative and leveraged. Not suitable for all investors. Capital at risk. See PDS and TMD

eToro offers extensive trading features, social trading tools, and copy trading to imitate the trades of other famous traders. Buy Australian & international shares with unlimited commission-free trades. (No brokerage). Other fees may apply.

1. What Is A Brokerage Account In Australia?

An Australian brokerage account refers to a taxable investment account maintained by a regulated brokerage firm.

The account allows investors to purchase various investment options with funds you deposit into the account. These include:

• Government and corporate bonds 

• Stocks

• Mutual funds

• ETFs

• Index funds

• Commodities

• Real estate investment trusts (REITs) and other assets

Let us understand what is a brokerage account by example:

An investor opens a fee-free brokerage account with a financial institution like investment companies, online trading platforms, and broker-dealers. It is the place where your financial products are kept.

Once the account is active, investors deposit funds into their brokerage account. The brokerage firm places investment orders for investments such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs), executes trades on their behalf, and usually collects a commission.
 

Before signing up with an online share trading platform, you should consider your needs, investment objectives, the features the platform offers, and the markets it serves (domestic or global). 

For example, if you want to buy Australian shares, you must open an ASX share trading account. On the other hand, if you intend to trade in US stocks, you need a platform providing access to Wall Street to trade.

With a cash account at a brokerage firm, you can only buy securities of the same or less value of the funds you have in your account.

For example - if you have $100, you can only buy assets worth $100. In other words, you can only purchase additional securities if you have more money.

2. What Is A Brokerage Account And How Does It Work?

A brokerage account is a tool that allows you to invest in the stock market. They can be taxable investment accounts or tax-advantaged retirement accounts.

Let's see how it works: You deposit money in a brokerage account to buy assets such as stocks, mutual funds, exchange-traded funds (ETFs), and bonds. 
 

Brokerage accounts serve various purposes, allowing you to conduct day trading for short-term gains or long-term objectives. Some brokerage accounts even offer competitive yields on idle cash.

A broker acts as the bridge between you and the stock market, executing asset transactions based on your instructions. Additionally, they oversee and safeguard the securities held within your brokerage account.

To start investing through a brokerage account, you need to deposit funds with a licensed broker and instruct them on the type of assets to invest in.

The broker takes care of carrying out an investor's trades. Some brokers offer monthly statements and transaction notifications, either in paper or digital format.

Brokerages typically charge annual fees to maintain your account. Additionally, you may incur commissions when buying or selling securities. Some brokers, such as eToro, don't charge any commission or brokerage when purchasing Australian and international shares.
 

If you don't have a trading account yet, consider eToro, used by many investors in Australia and worldwide. You can create an eToro trading account HERE.

eToro AUS Capital Ltd ACN 612 791 803 AFSL 491139. OTC Derivatives are speculative and leveraged. Not suitable for all investors. Capital at risk. See PDS and TMD

eToro offers extensive trading features, social trading tools, and copy trading to imitate the trades of other famous traders. Buy Australian & international shares with unlimited commission-free trades. (No brokerage). Other fees may apply.

3. Ways To Open A Brokerage Account

There are several ways in which you can open a brokerage account. Here are some of the available options you can consider:

• Full-Service Brokerage Accounts: Choose this option if you seek the expertise of a financial advisor to develop investment plans, place and execute trades, supervise investments and the markets, etc. Full-service brokerage accounts charge advisor fees or commissions on transactions to investors.

• Discount Brokerage Accounts: If you prefer a "DIY investment approach," this could be an ideal option. As these firms offer fewer services, their charges are also considerably lower fees. They may not be as convenient as their full-service counterparts. Discount brokers offer a monthly taxable account. You pay little or no commission to purchase or sell stocks, options, or ETFs.

• Cash Brokerage Accounts: Theyt come in two main varieties: full-service and discount accounts. These accounts require investors to deposit cash in order to start trading. With a cash brokerage account, you can engage in basic-level options such as purchasing stocks. However, advanced trades like short-selling are not available through this type of account.

• Online Brokerage Accounts: Online brokerages could be ideal if you prefer choosing your investments and executing your trades on a website or mobile app. Most online trading platforms offer analysis and research tools to assist investors in forming informed decisions. While most online brokerage account providers charge a specific commission per transaction, some offer commission-free trading on ETFs, options, and stocks.

• Robo-Advisor Accounts: Robo-advisors are accounts that use machine-generated algorithms to find the best investments without human participation on behalf of investors. However, you can only invest in ETFs or mutual funds through them. The best part of robo-advisors is that they charge a nominal fee of around 0.25% of assets under management annually.  Also, with no required minimum amount, it could be suitable for new and experienced investors who prefer a "hands-off" approach to portfolio management.

5. How To Open A Brokerage Account In Australia For Beginners?

Here are the steps you need to follow to open a brokerage account in Australia:

Step 1: Select Your Broker

Assess the available brokerage account providers on various factors to decide the suitable one for your needs. Some of these include:

• A discount broker or full-service broker 

• Type of investment options offered

• Charges for the type of investments

• Ease of use

• Account minimums

• Security 

• Availability of research tools  

• Speed and quality of service

• Access to customised advice

If you don't have a trading account yet, consider eToro, used by many investors in Australia and worldwide. You can create an eToro trading account HERE.

eToro AUS Capital Ltd ACN 612 791 803 AFSL 491139. OTC Derivatives are speculative and leveraged. Not suitable for all investors. Capital at risk. See PDS and TMD

eToro offers extensive trading features, social trading tools, and copy trading to imitate the trades of other famous traders. Buy Australian & international shares with unlimited commission-free trades. (No brokerage). Other fees may apply.

Step 2: Provide Your Details

After you have selected a firm and the brokerage account type, the next step is to provide certain information as part of the account opening process. These may include:

• Your Full Name 

• A valid form of photo ID such as passport, driver's license, or other government-issued ID

• Email address

• Phone number

• Employment information

• Residential address

• Financial data like annual income

• Tax File Number or Social Security number

Include the mentioned information in your application submission. It's important to note that the time required to approve brokerage account applications may vary between providers, typically taking 1 to 2 business days for processing.

Step 3: Link Your Bank Account

After your application gets approved, you can log in to your account and begin trading. Provide your bank account details that will be used to fund your account and execute your trades.

Step 4: Meet The Account Minimum

After your account opens, you may be required to deposit a minimum amount to start placing trades.

6. What Are The Best Brokerage Accounts In Australia?

(eToro Service ARSN 637 489 466 Capital at risk. See PDS and TMD)

7. How To Find The Best Brokerage Accounts For Beginners?

The best trading platform in Australia for beginners is the one that offers simplicity, cost-effectiveness, and security to its investors.

Here are the top ten things that can help ease your decision-making process:

Investment Goals

As different investors have different investment and financial needs, they should select their brokerage firms accordingly.

Those seeking advisory services may find a full-service brokerage firm useful, which charges higher fees than other brokerages.

Online brokerages offer cost-effective pricing structures and cater to investors who prefer to independently manage their trades, research, and other investment activities.

Your Trading Experience

Some online share trading platforms come with basic features for casual investors.

In contrast, others are designed for highly experienced traders and include special features such as advanced charting tools, live market data, speedy trade execution, and more.

All these features are complementary and help if you are an experienced trader. However, many of these advanced trading platforms may also charge some fees for cutting-edge tools.
 

Type of Markets Available to Trade

Some brokerage platforms only provide access to ASX-listed companies.

At the same time, others also allow you to place trades on overseas markets and access advanced trading instruments, such as contracts for difference (CFDs) and forex.

Balance Requirements

Specific brokerage accounts require you to maintain minimum account balances to avoid being charged an additional fee.

The best brokers for beginners have nil or very low minimums, which is ideal for those who wish to start small and gradually build their balances.

So, compare different brokerage accounts on the minimum balance requirements before finalising one.

Fees

Brokerage fees and ongoing fees are the two standard fees that most brokerage firms charge to their customers.

Your broker charges a brokerage fee each time you place a trade based on the trade size. An ongoing fee is a yearly fee that the broker charges you to service and maintain your account.

Apart from these, professionally managed brokerage platforms also charge management fees to their investors. It is generally structured as a percentage of assets under management.

Investment Options

Not all brokerage firms offer the same types of investments and services.

Some may not allow you to deal in over-the-counter stocks or common ties. So, before you choose a brokerage platform, ensure the firm you select accommodates your investment needs.

Trading Resources and Research Availability

From learning tutorials to research and investment advice, find out the type of tools a platform offers to assist you in making informed trading decisions.

Customer Service

Compare brokerage platforms on the level of customer service they provide. It is helpful when you are stuck in a problem or require assistance with a trade.

Ensure you access fast and reliable customer support through different commonly used channels such as phone, email, chat, support forums, etc.

Regulation

Ensure that the platform you choose is ASIC-regulated and has an AFSL (Australian Financial Services Licence).

Fund Selection

When considering mutual fund investments, seek out a broker that offers a wide array of choices, encompassing more than 10,000 funds, including many that do not impose minimum investment requirements.

8. Frequently Asked Questions (FAQs)

Which Brokers Are The Most Popular For Day Trading in Australia?

Finder's top pick for:

• Education & learning - eToro

• Australian stocks - CMC Markets Invest

• Low-cost broker - IG Share Trading 

Is It Wise To Have a Brokerage Account?

A brokerage account is a primary step to start your investment journey. It enables you to purchase bonds, stocks, gold, silver, and other securities.

Is it Safe To Keep More Than $500,000 in a Brokerage Account?

Nothing is entirely safe. However, an account at a famous brokerage firm offers a higher level of safety as the Securities Investor Protection Corporation provides up to $500,000 in protection for each brokerage account and an additional $250,000 cash limit.

You won't automatically lose your money if anything unfortunate happens with your brokerage account.

Should You Keep All Money In a Brokerage Account?

A brokerage account is an excellent place to park spare funds you don't require in the short term. However, there should be other things on your priority list.

Before putting your money in a brokerage account, you can:

• Build an emergency fund (3-6 months' worth of living expenses), 

• Repay any expensive/ high-interest debt like a credit card debt 

• Contribute to tax-advantaged retirement accounts such as a superannuation account.

You could consider buying stocks with whatever money remains after doing the above.

When Should You Open a Brokerage Account?

You can open a brokerage account when you have money you don't need for at least 3-5 years and are willing to take risks to grow your investment in high-risk and high-reward assets like stocks, ETFs, index funds, etc.

Do You Pay Taxes on Withdrawals From a Brokerage Account?

Withdrawing funds from a brokerage account typically doesn't have immediate tax implications. Taxes are typically incurred only when you realise capital gains by selling an investment.

It's important to note that withdrawing funds from a regular brokerage account does not trigger taxes. However, individuals with a brokerage retirement account may encounter penalties and tax consequences when making withdrawals.

How Much Should You Put In a Brokerage Account?

Experienced investors advise allocating just one-third of your surplus funds to your brokerage account. When you have additional funds, consider dividing them in the following manner:

• Mortgage paydown fund

• Non-necessary expense funds like a vacation, a car, etc. 

• Emergency savings

• Maximise superannuation contributions

• Contribute to your children's college funds (if applicable)

Allocating your spare funds into different baskets will put you in a great financial position.

After that, investing via a brokerage account will enable you to build wealth. Also, choose a top stock broker to get the required features and save from paying unnecessary fees.

What's The Difference Between a Brokerage Account and a Standard Account?

Both brokerage and savings accounts can help your money grow, but they're good for different things. Knowing what makes them different will help you choose the right one for your situation.

• Brokerage accounts are for money you don't need right away. If you sell investments quickly, you could lose money, and it might take a day or two to get your proceeds. Bank accounts are better for immediate needs, offering easy deposits and withdrawals without any risk of losing money.

• Secondly, regular savings accounts have low potential for passive income due to low-interest rates, while brokerage accounts offer higher income potential through investments but with higher risk.

• A bank account simply holds your funds, while a brokerage account with a licensed broker or brokerage firm allows you to invest in stocks and other securities, creating a diverse portfolio and mitigating investment risks.

Is Putting Money in a Brokerage Account a Good Idea?

Depositing money into a brokerage account can be a valuable addition to your emergency savings fund.

These accounts are typically recommended for investors with goals over five years away but not quite for retirement or paying off a mortgage.

Since brokerage accounts come with tax implications, it's advisable to prioritise building sufficient emergency savings and maximising your retirement accounts before opening a brokerage account.

What is The Downside To a Brokerage Account?

A brokerage account empowers you to manage your investments. Opening one is accessible to anyone with an initial deposit and access to a computer, and executing trades is also hassle-free.

However, there are a few drawbacks to investing through a brokerage account:

• Brokerage accounts are self-directed, meaning you have sole responsibility for managing your trades, especially when things don't go as planned.

• You have to pay capital gains from the sale of your investments.

• The investment learning curve is costly and steep for new investors with brokerage accounts.

• Unlike retirement accounts like superannuation accounts with tax benefits, investors using brokerage accounts pay taxes on selling assets or receiving dividends. So, based on the assets type held in your brokerage account, you may owe dividend taxes, capital gains taxes, or other taxes on your holdings.

• Unless you are a buy-and-hold investor, a brokerage account requires constant monitoring, staying on top of the news and market on specific investments to ensure that your assets are lucrative. 

• You must know how to analyse your broker's investments' quarterly reports or statements to analyse your investment performance. 

What is Better: A Brokerage Account or a Savings Account?

Both brokerage and savings accounts help you earn a return on your investment and save for the future.

However, they serve different objectives. One account may be better than the other based on how much capital you have and how long you can keep it aside.

So, here is a brokerage account vs. savings account to help you understand the right choice:

• Investment Period: A brokerage account is valid when you can set aside your spare money for the next five or more years. It is necessary as short-term withdrawal may lead to losses and can deprive you of potential gains. However, a savings account is a good place to set aside your savings to meet immediate needs like an emergency fund. You can withdraw it at any time without losing your investment capital.

• Purpose: Keeping money in a brokerage account is ideal for meeting long-term financial goals like your children's education and marriage, repayment of mortgages, retirement corpus, etc. The money you keep in a savings account is to fund immediate or day-to-day expenses.

• Risk and Returns: A brokerage account lets you invest in high-risk and high-return investments like stocks, ETFs, commodities, etc., that have greater potential to magnify your investment value or result in hefty losses. Thus, brokerage accounts are ideal to keep only that money you can afford to put at risk to earn a higher return. On the other hand, the savings account offers a relatively lower interest rate but is safer due to government backing.

• Diversification: A brokerage account gives you the benefit of diversification that helps balance your portfolio and minimise investment risks. You can invest your money in stocks, ETFs, commodities, etc. However, you don't benefit from diversification when your money stays in the savings account.

• Liquidity: Savings accounts offer a high level of liquidity. You can withdraw your money at any time you need. However, you can't instantly withdraw your investments from a brokerage account. After placing the withdrawal request, getting the funds in your account takes at least a day or two.

• Certainty: A savings account is ideal for you if you are a risk-averse investor and need certainty about how much returns you will get on your investment. Unlike the stock market, where your investment can change anytime, a savings account assures you that the balance will accrue interest and go up if you don't withdraw it. A savings account offers maximum certainty but won't make you rich. Even the highest-yielding savings accounts can't beat inflation. Thus, a savings account can grow your wealth but reduce inflation's impact.

• Tax: In a savings account, the interest earned is taxable. However, you can claim it when filing your tax return. When you invest with a brokerage account, the profit you make from the sale of your investment attracts short-term or long-term capital gains tax based on how long you hold the asset.  

Do You Own The Stocks in You Brokerage Account?

The assets held within a brokerage account are owned by the investors, and typically, they are required to report any income generated from the account, including dividend income and profits from asset sales, on their tax return.

What is a Brokerage Account Used For?

Brokerage accounts enable you to earn a return on your investment and save for the future. It is most useful for the money you can keep aside for the next five or more years.

You must remember that a brokerage account is meant for only that money you can afford to risk to earn a higher return.

There are more suitable options for stashing away an emergency fund or savings designated for an imminent and essential purchase.

How To Open a Brokerage Account in Australia Online?

It is easy and quick to open a brokerage account online. You must register on the brokerage website and provide necessary personal information such as your date of birth, address, and Social Security number.

Account gets approved fast, and once opened, fund your new account online or wire transfer to start placing trades.

Which Trading Platform is Best For Beginners in Australia?

eToro is an ideal brokerage account for beginners starting their investing journey.

It is easy to use and offers a mix of ETFs, stocks, crypto, contracts for difference, and forex. It also provides numerous educational resources and techniques like copy-trading to learn trading markets.

Being one of the cheapest brokers, eToro is the first to offer $0 brokerage on Australian and international stocks. Besides, the broker lets you trade globally.

eToro is the preferred online trading platform for the following:

• $0 commissions on ASX and global stocks

• Fractional shares

• Low minimums

• Copy-trading feature

• Trade sixteen global markets 

• A single place for stocks, CFDs, forex, and cryptocurrency

Should You Put Your Savings in a Brokerage Account?

Deciding whether or not to put your extra money in a savings or brokerage account requires considering your investment timeline and goals for the funds.

If you require the money to meet a short-term financial goal, like purchasing a house in a year, then a savings account is the best place for it.

However, if you wish to make your money work to build wealth over time, putting money in a brokerage account could be a better choice.

9. Conclusion

Brokerage accounts offer an opportunity for investors to trade in a range of securities.

They can help you meet long-term financial needs like retirement or execute specific goals, like purchasing a property, buying a house, or paying for college.

Opening a brokerage account is easily accomplished through online trading platforms, conventional broker-dealers, investment firms, and financial service providers.

Nonetheless, when taking this vital step, choosing a trustworthy company is crucial. After all, this account involves your hard-earned money and represents an investment in your future.

If you don't have a trading account yet, consider eToro, used by many investors in Australia and worldwide. You can create an eToro trading account HERE.

eToro AUS Capital Ltd ACN 612 791 803 AFSL 491139. OTC Derivatives are speculative and leveraged. Not suitable for all investors. Capital at risk. See PDS and TMD

eToro offers extensive trading features, social trading tools, and copy trading to imitate the trades of other famous traders. Buy Australian & international shares with unlimited commission-free trades. (No brokerage). Other fees may apply.

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