What Is A Brokerage Account and How Does It Work? 5 Things you must know!

Summary

The video script provides an insightful overview of brokerage accounts, which are essential for investing outside of retirement accounts. It explains the role of a brokerage firm as a middleman to execute investment orders on behalf of the investor. The video distinguishes between full-service firms, which offer financial advisors to manage portfolios, and discount brokers, which are favored by self-directed investors seeking control over their investments. It also highlights the newest type of brokerage firms, online brokers, which offer app-based trading. The script emphasizes the importance of understanding the tax implications of brokerage accounts, which are subject to capital gains tax, differentiating between short-term and long-term gains. It advises viewers to align their investment goals with the right type of brokerage firm and to limit the number of brokerage accounts for simplicity. The video also guides viewers through the process of opening a brokerage account with Vanguard, stressing the importance of having retirement plans in place before focusing on brokerage accounts.

Takeaways

• 💼 **Brokerage Accounts for Investing**: A brokerage account is necessary for investing in stocks or funds outside of retirement accounts.
• 📈 **Types of Brokerage Firms**: There are full-service firms for hands-off management, discount brokers for DIY investors, and online brokers for mobile trading convenience.
• 🤝 **Financial Advisor Role**: With full-service firms, a financial advisor manages your portfolio, but it's crucial to stay informed about your investments.
• 💰 **Tax Implications**: Unlike retirement accounts, brokerage accounts are taxed differently, with capital gains tax applied to profits.
• 🕒 **Short-term vs. Long-term Capital Gains**: Short-term gains (within one year) are taxed at your effective tax rate, while long-term gains (over one year) are generally taxed at a 15% rate.
• 🧐 **Choosing a Brokerage Firm**: Select a firm based on your investment goals, the types of investments you plan to make, and the costs associated with trading.
• 📊 **Cost Considerations**: Be aware of transaction fees and the cost of trading different types of funds across various brokerage platforms.
• 📱 **Online Brokerage Accessibility**: Online brokers offer the convenience of trading from your smartphone, making investing more accessible.
• 🚫 **Limit Brokerage Accounts**: It's recommended to minimize the number of brokerage accounts to simplify tax reporting and management.
• 💬 **Research Before Opening**: Understand the fees and benefits associated with each brokerage firm before opening an account.
• 💹 **Retirement Account Priority**: Ensure your retirement accounts are funded and on track before focusing on brokerage account investments.
• 👍 **Community Engagement**: Engage with the channel by subscribing and liking videos to join the investment community.

Q & A

What is a brokerage account used for?

A brokerage account is used for investing outside of retirement accounts. It allows individuals to buy and sell shares of companies like Apple, Amazon, or Tesla, or invest in index funds through a brokerage firm or investment company that acts as a middleman to execute their orders.

What are the different types of brokerage firms mentioned in the script?

The script mentions three types of brokerage firms: full-service firms where a financial advisor manages your portfolio, discount brokers for do-it-yourself investors who prefer more control over their investments, and online brokers which allow users to trade stocks through a mobile app.

How does a brokerage account differ from a retirement account in terms of taxes?

Brokerage accounts are taxed differently than retirement accounts. Retirement accounts often have tax advantages, whereas money made in a brokerage account is subject to capital gains tax, which can be short-term or long-term, with short-term gains taxed at the same rate as one's effective tax rate and long-term gains generally taxed at a 15% rate.

What factors should one consider when choosing a brokerage firm to open an account with?

Factors to consider include the individual's investment goals, the types of investments they plan to make, the costs associated with different types of trading (e.g., day trading vs. buy and hold), the research and tools provided by the brokerage firm, and any transaction fees for buying funds from different investment companies.

Why is it recommended to limit the number of brokerage accounts one has?

Having multiple brokerage accounts can complicate tax reporting, as each account will generate a separate statement that needs to be included in one's taxes. It's simpler and more efficient to manage a smaller number of accounts, and modern brokerage accounts often allow for the purchase of funds from various investment companies without additional fees.

What is the general process for opening a brokerage account?

The general process involves choosing the account type, completing an online application, providing personal information and bank account details, reviewing and signing documents, and waiting for confirmation. The specific steps may vary slightly by brokerage firm.

Why is it important to ensure retirement accounts are on track before investing in a brokerage account?

Retirement accounts offer tax advantages and are designed to fund an individual's financial needs during retirement. Ensuring that retirement accounts are adequately funded can help guarantee financial security in the future, and it is prudent to prioritize these before engaging in other forms of investing.

What is the role of a financial advisor in a full-service brokerage firm?

In a full-service brokerage firm, a financial advisor is assigned to the client. They manage the client's portfolio, execute trades on their behalf, and provide professional guidance throughout the investment process.

How does the tax treatment of gains in a brokerage account affect an investor's decision-making?

The tax treatment of gains, which includes both short-term and long-term capital gains tax rates, can significantly impact an investor's returns. Understanding these tax implications is crucial for making informed investment decisions and for strategic planning to minimize tax liabilities.

What are some popular discount brokers mentioned in the script?

Some popular discount brokers mentioned are Vanguard, Fidelity, Charles Schwab, and T. Rowe Price. These firms cater to investors who prefer a more hands-on approach to managing their investments.

What is the significance of knowing one's investment goals before opening a brokerage account?

Knowing one's investment goals is crucial for selecting the right brokerage firm and account type. It helps in determining the necessary tools, research capabilities, and potential costs associated with different investment strategies, ensuring that the chosen brokerage account aligns with the investor's objectives.

Why might someone choose an online broker over a full-service or discount broker?

An online broker might be chosen for its convenience, typically offering user-friendly apps for trading stocks, lower fees, and the ability to quickly execute trades. This option is particularly appealing to investors who are comfortable managing their investments without the need for extensive personal advice or guidance.

Outlines

00:00

📈 Introduction to Brokerage Accounts and Investment Basics

The first paragraph introduces the topic of brokerage accounts, emphasizing their necessity for investing outside of retirement accounts. It mentions the importance of understanding certain aspects before signing up for one and provides a brief overview of the types of brokerage firms: full-service firms, discount brokers, and online brokers. The speaker, Diamond, outlines the process of how a brokerage account works, from depositing money to executing orders for buying shares. The paragraph also touches on the differences in taxation between retirement and brokerage accounts, highlighting capital gains tax implications for investments made within a brokerage account.

05:01

💼 Choosing the Right Brokerage Firm for Your Investment Goals

The second paragraph delves into the decision-making process for selecting a brokerage firm. It stresses the importance of aligning the firm's services with the investor's goals, whether they are a day trader or a buy-and-hold investor. The paragraph discusses the cost differences and the necessity of having the right tools for different investment strategies. It also addresses the concept of transaction fees and how they vary between firms, especially when purchasing funds from different companies. The speaker advises on minimizing the number of brokerage accounts to simplify tax reporting and emphasizes the importance of researching potential firms before opening an account. The paragraph concludes with a step-by-step guide on opening a brokerage account with Vanguard as an example.

10:01

🚫 Prioritizing Retirement Savings Before Brokerage Investments

The third paragraph focuses on the importance of having a solid retirement plan before engaging in brokerage account investments. It explains the tax advantages of retirement accounts and the potential consequences of neglecting them. The speaker advises ensuring that retirement savings are on track, even if retirement seems far off, to secure financial stability later in life. The paragraph ends with a call to action for viewers to engage with the content, subscribe to the channel, and explore additional resources on debt management and investment strategies.

Keywords

💡Brokerage Accounts

Brokerage accounts are financial services that allow individuals to invest in the stock market. They act as a middleman between the investor and the companies whose shares they wish to buy. In the video, the speaker discusses the importance of these accounts for investing outside of retirement accounts and provides an overview of how they operate.

💡Full Service Firm

A full service firm is a type of brokerage firm where clients are assigned a financial advisor who manages their investments. This service is typically more hands-off for the investor, as the advisor executes trades and manages the portfolio on their behalf. The video mentions this as one of the types of brokerage firms, contrasting it with discount brokers and online brokers.

💡Discount Brokers

Discount brokers offer a more self-directed approach to investing, where the investor has more control over their investments. These brokers typically charge lower fees than full service firms, making them popular among DIY investors. The video emphasizes the hands-on nature of discount brokers and how they cater to investors who prefer to manage their own portfolios.

💡Online Brokers

Online brokers represent the latest evolution in brokerage services, allowing users to open accounts and trade stocks through mobile apps. This type of broker is characterized by its convenience and user-friendly interface, making it accessible for a wide range of investors. The video discusses online brokers as the newest type of brokerage firm and mentions examples like Weeble, M1 Finance, Acorns, and Robinhood.

💡Capital Gains Tax

Capital gains tax is a tax on the profit made from selling an investment, such as stocks or real estate. The video explains that there are two types of capital gains: short-term and long-term. Short-term gains are taxed at the investor's effective tax rate if the investment is sold within a year, while long-term gains, from investments held for over a year, are taxed at a generally lower rate of 15%.

💡Retirement Accounts

Retirement accounts, such as 401k, 403b, IRA, and others, are savings vehicles designed for long-term financial planning and are often tax-advantaged. The video distinguishes these accounts from brokerage accounts, emphasizing that they are meant for retirement savings and have different rules and tax implications.

💡Tax-Advantaged

Tax-advantaged refers to financial products or accounts that offer some form of tax benefit, such as lower tax rates or tax-deferred growth. In the context of the video, retirement accounts are described as tax-advantaged because they either allow for tax-deductible contributions or tax-free growth, making them an important part of financial planning.

💡Day Trader

A day trader is an individual who frequently buys and sells financial instruments within a single trading day. The video suggests that the choice of brokerage firm may depend on the investor's trading style, with day traders potentially requiring different services and tools compared to buy-and-hold investors.

💡Buy and Hold

Buy and hold is an investment strategy where an investor purchases stocks or other assets and holds onto them for an extended period, with the expectation that they will increase in value over time. The video contrasts this approach with day trading and discusses how different brokerage firms may cater to these different investment strategies.

💡Index Funds

Index funds are a type of mutual fund or exchange-traded fund (ETF) that aims to replicate the performance of a specific index, such as the S&P 500. The video mentions index funds as an example of a type of investment that a brokerage account holder might be interested in, and how the choice of brokerage firm can affect the cost of investing in these funds.

💡Transaction Fees

Transaction fees are charges that investors pay when they buy or sell securities, such as stocks or mutual funds. The video discusses how some brokerage firms offer no transaction fees for buying third-party funds, which can be an important consideration when choosing a brokerage account.

Highlights

A brokerage account is necessary for investing outside of retirement accounts.

Different types of brokerage firms include full-service firms, discount brokers, and online brokers.

Full-service firms provide a financial advisor to manage your portfolio.

Discount brokers are for do-it-yourself investors who prefer more control over their investments.

Online brokers offer convenience through mobile apps for buying and selling stocks.

Brokerage accounts are taxed differently than retirement accounts, with capital gains tax applicable.

Short-term capital gains are taxed at the same rate as your effective tax rate.

Long-term capital gains are generally taxed at a 15% rate.

Choosing a brokerage firm depends on your investment goals and the types of investments you plan to make.

It's important to research the costs and services of different brokerage firms before opening an account.

Having multiple brokerage accounts can complicate tax reporting.

It's recommended to limit the number of brokerage accounts to one or two for simplicity.

The process of opening a brokerage account involves choosing an account type, completing an online application, and confirming details.

Vanguard, Fidelity, Charles Schwab, and T. Rowe Price are examples of discount brokers offering services at lower costs.

Brokerage accounts allow you to buy funds from different investment companies, often with no transaction fees.

Ensuring your retirement accounts are on track before investing in a brokerage account is crucial.

Retirement accounts offer tax advantages, either by saving on current taxes or allowing for tax-free growth.

The presenter, Diamond, emphasizes the importance of investing as a means to achieve retirement goals.

Transcripts

what's up my people i want to talk to

you real quick about brokerage accounts

that's what you're going to need if you

want to invest outside of your

retirement accounts

and before you go run off and sign up

for one there's a few things you want to

know about

and that's what we're going to dive into

in this video plus

i'm going gonna jump on a computer so we

can actually go through the steps so you

can see what's involved

in opening up one of these accounts

welcome to the channel my name is

diamond

and this is the place where personal

finance intersects with the real world

to help you

achieve your financial goals and that

includes investing

so if you haven't done so already be

sure to click the subscribe button so

that you can join the community

and let's jump right in when you want to

go out and buy a share of apple

amazon or tesla or heck maybe you want a

little piece of

every company out there through an index

fund you don't go to these companies and

purchase these shares directly from them

you need a middleman to act on your

behalf and that's what a brokerage

account is

it's an account that you open with a

brokerage firm or an investment company

so that they can go out and execute your

orders

so they work like this you open an

account and then you deposit some money

once the money is in the account now you

have the ability to submit your orders

so if you want to buy five shares of

tesla all you need is enough money to

pay for five shares

you submit the order and then boom you

now own

a piece of tesla now there's a few type

of

brokerage accounts and brokerage firms

out there the first type is going to be

your full

service firm maybe you talk to someone

and ask them hey how's your portfolio

doing

and they was like i don't know i got a

guy he handles all that

that's most likely a full service

brokerage firm

where you're assigned a financial

advisor and you turn your money over to

them

and they execute orders on your behalf

they're managing your money

your portfolio for you now if you're

wise

you're being very cautious and you're

tracking what they're doing

so that you know where all the money is

moving and you know what's going on in

that account

but you have a professional that's there

doing things for you and guiding you

through the process

another type that's out there is your

discount brokers and this is going to be

more for your do-it-yourself

investors you know like you and i we

want to get a little more hands-on

in our investments and we don't mind if

we need to

ask a question or find out some new

information but

for the most part we want to be in

control of what's going on with our

money and we want to

pick and choose our investments choose

when to go in how long and hold them and

when to get out

this is going to be your discount

brokers and this is probably the most

popular type that's out there

you've probably heard of some of these

discount brokers things like

vanguard fidelity charles schwab t rowe

price

these are companies who offer discount

services as well as

some full range services the last type

of broker's firm is the newest kid on

the block

this is your online brokers and this is

where you can download an app

open an account and now from your cell

phone you're buying and selling stocks

through your brokerage account and these

are things like

weeble m1 finance acorn

robin hood the list goes on and on and

on but before you go run off and open

these accounts

there's a few things you need to know

about brokerage accounts

the first thing you need to know is that

these accounts are

outside of retirement accounts so when

you want to invest in retirement you're

going to look for

things through your employer like a 401k

or 403 b

or outside of your employer you're going

to invest in things like a

ira and if you're self-employed that's a

set ira or a simple

ira but those are your retirement

accounts

a brokerage account is in addition to

those and they're completely separate

and the rules are different

the biggest thing you need to know about

brokerage accounts

is that they are taxed differently than

your retirement accounts

most retirement accounts have some type

of tax advantage to them

that's why their retirement accounts but

when you open a brokerage account

it's not protected by the same rules

money made in a brokerage account is

subject to capital gains tax

and there's two types of capital gains

you have short term

and long term short term is those

gains that are made on investments that

you have bought and sold within one

year and they're taxed at the same rate

as your effective tax rate so if your

effective tax rate is 30 percent

you can expect to pay 30 percent on all

the gains you made

that fall within the short term capital

gains window

now a long-term capital gains is going

to be those investments that you hold on

to

for a year or longer and generally

speaking

your long-term capital gains rate is

going to be 15

so when you hear people telling you

about the best stocks to buy and

dividend investing and all this

different stuff a lot of times you don't

hear them

talking about the tax implications of

those accounts

and if you open a brokerage account yeah

it's as easy as downloading the app and

getting

money in there and start buying and

selling but you have to be careful and

understand that

that money will be taxed which is not a

problem as long as you understand that

going

into it now how do you choose which

brokerage firm

to open your brokerage account with

because there's literally

hundreds of brokerage firms out there

that's going to depend on

what is your goals with your investment

what are you

planning on investing in because if you

want to be a day trader

you're going to open an account with a

different company than a person who

wants to

buy and hold mutual funds or etfs

because the cost is different and the

research and tools you need at your

fingertips

is going to be completely different

between a buy and hold investor

and a day trader and even if you're a

buy and hold investor and all you want

to invest in is

index funds there's still some things

that you're going to need to look at

between your different brokerage firms

so that you make sure that you're

getting the best deal

possible for example it would make sense

if you wanted to buy

fidelity funds and you opened a

brokerage account with fidelity

you can buy any of their funds at little

to no

cost but what if you want to buy some

vanguard funds within your fidelity or

maybe you want some

tea row price or charles schwab what is

that going to cost you

and that's the type of research you want

to look at like i know for example

if i have a vanguard account it's

cheaper for me to buy

fidelity funds through vanguard than it

is for me to buy

vanguard funds through fidelity and

that's the type of things that you want

to be

researching when you're looking at these

different investment companies

so knowing what you want to buy before

you ever open an account is going to be

crucial in making the right decision

off the back you want to limit the

number of brokerage accounts you have

down to as small a number as possible

i'm talking one maybe two you don't want

to have

four or five online brokerage accounts

plus four different apps going on your

phone

because that's going to make it a

nightmare for you at tax time because

you're going to get a statement from

each one of these companies

and now you report all your transactions

from each one of these companies

in your taxes and it's just no need to

do that anymore because

now through one brokerage account you

can buy

hundreds of funds from different

investment companies

and a lot of these come with no

transaction fees which means

if you want to buy a third-parties fund

you don't have to pay any extra money so

if i have a vanguard account and i want

to buy a t-ro price fund

i don't have to pay anything extra to do

that so it's no need for me to open

another brokerage account over at t row

price it's really only three steps to

opening a brokerage account so let's

jump on the computer so i can show you

what that looks like and then we'll come

back here to wrap it up

for this example we're going to open a

brokerage account with vanguard

so once you're on your site you click on

personal investor

from here at the top you just click on

open account

and from here you're going to select new

account or if you're moving a brokerage

account to vanguard you would select

begin my transfer

but for now we're gonna open a new

account

here's actually how are you gonna find a

new account and for this we're gonna use

an electronic transfer

from our bank click continue and if you

already have a vanguard account you can

click here and all your personal

information will be pre-field

but for now we're gonna say no i'm new

here

and the account process is as easy as

one two three

choose your account type complete the

online application

and wait for the confirmation and what

you need is your routing number for your

bank

and your current employer's information

so i'll click continue here and

on step one says tell us about you

why are you investing and since we're

doing a brokerage account this will be a

general savings account and you select

whether you want to have this as an

individual account a joint account or

are you doing it in the name of a trust

for now we'll hit individual

click continue and what is your primary

investing goals

and this will be up to you but for this

one we're going to say

we're looking to grow our money and

we're looking to generate

income off of it at some point and the

source of your funds

is self-explanatory for this one we're

going to say it's just coming from our

regular

salary and you click continue

now at this point i'll stop here but

here you can see you're actually to put

in your personal information

your name date of birth so security

number email

and once you click continue here you're

just going to enter your bank account

information in step 2

review and sign your documents and sign

up for web access

and the fifth step is to confirm

everything and wait for that

confirmation

and it's just that simple to sign up and

create a brokerage account

as you can see it's not that difficult

to open a brokerage account and i've

already talked about the taxes

on those accounts but i want to leave

you with one more tip

and that tip is to make sure that your

retirement is on track

and you're utilizing your retirement

vehicles and the reason

for that is because those accounts have

some type of tax advantage

meaning you're either saving money on

your taxes now

or you're paying taxes on that money

today

but the growth is tax-free and you're

going to be able to pull that money

out without paying taxes in the future

so it's important

to make sure that your retirement is on

track before you start investing in

your brokerage account now i know a lot

of people say they don't want to wait to

retirement because

most retirement accounts have some type

of age restriction on it

most commonly that's 59 and a half and a

lot of people say i don't want to wait

till i'm

59 and a half or 60 years old to retire

but it makes a lot of sense to make sure

that your days from 59 or 60 years old

until death

is squared away and paid for by funding

those retirement accounts

before you worry about being able to

take care of yourself between now

and 59 and a half so that's why i always

recommend people have

their retirement on track before you

start working on your

brokerage account if you got value out

this video if you learned something from

this video

then let me know by giving it a thumbs

up and subscribe to the channel

for more investment videos just like

this and if you want to invest

but you're sitting there thinking i

would love to do all this

but my debt is in the way if that's you

then i want you to click on this

playlist right here that's talking all

about how to get out of debt using real

world

no-nonsense advice and until next time

i'm diamond

peace a lot of people mistakenly believe

that if they make enough money in their

life

they'll be able to retire the truth is

you have to invest the money you make

and that is how you retire