What is a brokerage account and how does it work?

What is a brokerage account?

A brokerage account is an investment account that lets you buy and sell securities like stocks and ETFs through a licensed broker or online platform. These accounts provide the primary gateway for individuals to participate in the financial markets.

In the United States, brokerage accounts are managed by broker-dealers. These entities are strictly regulated by the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC). This regulatory oversight helps maintain market integrity and protects retail investors.

One key benefit of using a regulated broker is asset protection. Assets in these accounts are typically covered by the SIPC for up to $500,000 in the event of a broker's failure or bankruptcy, but not for potential market losses. While brokerage accounts can help users build wealth over time, it’s important to remember they still involve risk.

How does a brokerage account work?

A brokerage account acts as a financial bridge between investors and the financial markets, allowing a licensed broker to execute trades on their behalf. Here’s how it commonly works:

1. Open an account: Choose a licensed broker and create your account. You can open a Crypto.com Stocks account using the Crypto.com App. 
2. Deposit funds: Add money to your account using the deposit methods available. With us, you can use bank transfer (free)*, debit card, Apple Pay or Google Pay.
3. Place orders: Once your funds are cleared, you can select your assets and choose between market orders for immediate execution or limit orders to set a specific price. Crypto.com Stocks offers access to over 12,000 US shares and ETFs from 0% commission, including the ability to buy fractional shares.
4. Trade execution: The broker receives the instructions and executes the trade on your behalf. During execution, the account tracks relevant costs, which may include spreads, margin interest or commissions.
5. Portfolio management: You can track your portfolio performance and manage your holdings directly within the online platform or app, if available.
   

Types of brokerage accounts

The most common structures for brokerage accounts are:

• Cash accounts: These require investors to pay the full amount for any securities purchased using available cash.
• Margin accounts: These allow users to borrow funds from the broker to trade, which can increase buying power but carries significantly higher risk.
• Taxable brokerage accounts: These are standard accounts with no specific tax advantages; they’re subject to capital gains tax on profits.
• Retirement accounts: Examples include Individual Retirement Accounts (IRAs), which offer tax advantages but often come with restricted withdrawals until a certain age.

The right account for you depends on your investment goals, risk tolerance and tax preferences. Most beginners find that starting with a simple cash account is a prudent way to learn the ropes without the added complexity of borrowing funds.

When evaluating platforms, check if they offer educational tools and a user-friendly mobile interface. 

Brokerage account vs. savings account

While both accounts can be used to accumulate funds, the primary difference lies in their purpose – investing versus saving. 

A savings account focuses on capital preservation and liquidity, offering lower, stable returns. These accounts are typically protected by FDIC insurance. Brokerage accounts are designed for investing with a focus on potential growth through market participation. 

Unlike savings accounts, assets in a brokerage account carry market risk, meaning the value can go down as well as up. This market risk is counterbalanced by higher earning potential, as investing is more likely to beat inflation over the long term.

Learn about switching online brokers

In terms of protection, while FDIC covers savings accounts, SIPC provides a backstop for brokerage accounts in the specific case of a broker’s failure, covering up to $500,000 in assets. SIPC doesn’t protect against investment losses due to market fluctuations.

The primary trade-offs include:

• Purpose: Saving for short-term goals vs. investing for long-term growth.
• Risk level: Lower financial risk for savings vs. higher market risk for investments.
• Earning potential: Lower, stable returns in a savings account vs. higher potential returns in a brokerage account.
• Protection type: FDIC insurance for savings vs. SIPC protection for brokerage assets.
  

Pros and cons of a brokerage account

Potential benefits of a brokerage account

• Access to diverse investments: These accounts provide a gateway to a vast range of securities, including thousands of US stocks and ETFs. This allows you to build a diversified portfolio rather than relying on a single asset class.
• Potential for long-term returns: Unlike the fixed interest rates of a savings account, brokerage accounts could help your capital to grow alongside the market. 
• Flexible account options: Whether you’re looking for a taxable account for short-term goals or a retirement account (like an IRA) for later in life, there are various structures designed to fit your specific financial situation.
• Low barrier to entry: Modern platforms like Crypto.com Stocks offer features like fractional shares, meaning you can start trading with small amounts of capital rather than needing the full price of a single expensive stock.

Risks of a brokerage account

• Subject to market risk: The most critical factor to remember is that the value of your investments can fluctuate based on market conditions. You may lose some or all of your invested money.
• Tax implications and fees: Profits made from selling assets are generally subject to capital gains tax. Additionally, while many trades are now commission-free, users may still incur costs such as spreads or interest if they choose to use a margin account.
• Required learning curve: Success in the markets isn't about luck; it requires a strong foundational understanding of market mechanics. 
  

How to open a brokerage account with Crypto.com Stocks

1. Download the Crypto.com App and sign up for a Crypto.com Stocks account. Choose between a cash or margin account.
2. Verify your account using our online KYC process.
3. Deposit funds using your preferred method.
4. Start trading 12,000+ US stocks and ETFs, or fractional shares – commission-free.

* Other fees and a spread may apply.

Foris Capital US LLC (“FCUL” or referred to herein as “Crypto.com Stocks”) is a broker-dealer registered with the U.S. Securities and Exchange Commission (SEC) and a Member of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC). For further information about FCUL, please visit FINRA BrokerCheck.
FCUL is a subsidiary of Crypto.com. 

Fractional shares are not available for all equities.

All investments involve risk, and not all risks are suitable for every investor. The value of securities may fluctuate and as a result, clients may lose more than their original investment. Past performance does not guarantee future results.