Buhata
Login Start for Free

Home › Life Terms

Saving and investing basics

Brokerage account

An account at a brokerage firm that holds your cash and the stocks, bonds, funds and ETFs you buy and sell through that firm.

What It Means

A brokerage account is an account you open with a brokerage firm to buy, hold and sell investments such as stocks, bonds, mutual fundsMutual fundAn SEC-registered fund that pools money from many investors to buy stocks, bonds or other securities, with shares you can sell back to the fund each business day. See more and ETFsETFAn exchange-traded fund: a pooled investment fund whose shares trade on stock exchanges throughout the day at market prices. See more, along with any cash waiting to be invested. The firm holds the investments for you and carries out your trades. Unlike a bank deposit, the investments inside can rise or fall in value. If the firm itself fails, the Securities Investor Protection Corporation (SIPC) may protect the cash and securities it was holding for you, within set limitsLimit settingDeciding and calmly holding the rules for what a child may and may not do, explained in words the child can understand and followed through every time. See more.

Try It: Does SIPC Cover This?

Pick Covered or Not covered for each one. Answers follow Investor.gov and SIPC.

Correct so far0
Out of4

How People Say It

  • "I keep my index funds in a regular brokerage account."
  • "The cash is just sitting in the brokerage, not invested yet."
  • "Is that account SIPC or FDIC?"

The Breakdown

An example. Maria opens a brokerage account and moves in $6,000. She puts $5,000 into an ETF, and $1,000 waits as cash. Over the next few months she adds $50 a week, and her app buys fractions of a share with each deposit.

Where it goes wrong. Two things surprise her. The ETF drops 12% in a rough quarter, and she assumes some kind of insurance will make it good. SIPC doesn't: its protection is about a failed firm losing track of customers' cash and securities, and it doesn't cover a fall in market value. Later she thinks about moving everything to another brokerage. FINRA notes fractional shares may not transfer between firms, so she may have to sell them first, which can mean taxes and fees.

Taxes when she sells. In a regular, taxable brokerage account, selling for more than she paid creates a capital gainCapital gainsThe profit when you sell an investment or other capital asset for more than you paid; the tax depends on whether you held it more than one year. See more. IRS Topic 409 says the gain is long term if she held the investment more than one year and short term if she held it one year or less.

What to watch for

  • SIPC membership. Check that the firm is a member before you open an account.
  • What's covered. SIPC's limit is $500,000 per customer, and up to $250,000 of that can be cash.
  • Fractional shares. Ask how they're handled if you ever want to move your account.
  • Records. Keep trade confirmations and statements, since they show what you paid.

Good to Know

Investor.gov says most registered brokerage firms that deal with the public are SIPC members. If a member firm fails, your cash and securities held there may be protected up to $500,000, including a $250,000 limit for cash. SIPC doesn't cover losses from a drop in the market, worthless securities or a broker's bad investment advice. FDIC insurance is for bank deposits, so it doesn't cover a brokerage account. Before you open one, Investor.gov's bulletin "How to Open a Brokerage Account" is a good plain-language read.

FAQ

Is money in a brokerage account insured?

Not the way a bank deposit is. SIPC may protect up to $500,000 per customer, including $250,000 in cash, if a member firm fails, but it doesn't cover losses when your investments fall in value.

What can I buy in a brokerage account?

Typically stocks, bonds, mutual funds and ETFs, depending on the firm. Some firms also let you buy fractional shares, meaning part of one share.

Do I pay taxes on a brokerage account?

In a regular taxable account, you generally owe tax on gains when you sell. IRS Topic 409 explains how gains held more than one year are treated differently from gains held one year or less, and a tax professional can help with your own situation.

Do It in Buhata

Accounts

Add your brokerage account to Accounts in Buhata so its balance sits beside your checking and savings.

Open Buhata

Related Terms and Categories

  • ETF

    An exchange-traded fund: a pooled investment fund whose shares trade on stock exchanges throughout the day at market prices.

  • Index fund

    A mutual fund or ETF that aims to track the return of a market index, such as the S&P 500, instead of picking investments to beat it.

  • Mutual fund

    An SEC-registered fund that pools money from many investors to buy stocks, bonds or other securities, with shares you can sell back to the fund each business day.

  • Capital gains

    The profit when you sell an investment or other capital asset for more than you paid; the tax depends on whether you held it more than one year.

  • Micro-investing

    Investing small amounts regularly, often a few dollars at a time through an app, usually by buying fractions of shares.

  • Robo-advisor

    An online investment adviser that uses computer algorithms to build and manage a portfolio for you from your answers to a questionnaire.

Saving and investing basics

Sources

Investor.gov, "Investor Bulletin: SIPC Protection (Part 1: SIPC Basics)"; Investor.gov, "Securities Investor Protection Corporation (SIPC)" (glossary); SIPC, "What SIPC Protects"; Investor.gov, "Investor Bulletin: How to Open a Brokerage Account"; FINRA, "Investing in Fractional Shares"; IRS, "Topic no. 409, Capital gains and losses"

Last updated .