A brokerage account is basically that which an investor opens at a brokerage firm. Opening a brokerage account allows would-be investors to buy stocks, bonds, and other securities by employing the services of brokers.
Brokers are professionals who act as intermediaries between buyers and sellers that earn commissions for facilitating transactions, and the amount depends on the kind of service offered. Traditional brokers also offer advice and provide information on stocks to clients, particularly those who are not inclined to conduct their own research.
Brokerages provide clients with the option to set up a monthly withdrawal arrangement which transfers a certain amount from the client’s bank account to the brokerage account.
There are different kinds of brokerage accounts. A cash account requires the investor to settle the full amount of the securities before the settlement date, which is typically three business days after the trade date. The amount received from the sale is then transferred to the seller’s account.
On the other hand, a margin account lets investors buy securities without paying the full amount. The brokerage firm lends the remaining amount needed to meet the cost of the security. Interest is charged on this amount.
Under a discretionary account, the brokerage firm is given the right to make decisions on which securities to buy or to sell and determine the price of the transactions. Since the broker is given much freedom under this arrangement, it is important that the investor still monitors his account and investment activity closely.