Brokerage account: what is it and how to use it to generate income
Whether you’re a beginner investor or an experienced one like Wall Street’s Jordan Belfort, you need two things to invest and make a profit: a brokerage account and money. With money, the moment is clear to everyone, but the first component of success, as a rule, raises a number of questions, especially among novice investors.
It is prohibited to conduct direct trading on exchanges, regardless of the type of transaction, whether it is the sale and purchase of securities, futures or any other investment, all these operations require the presence of an intermediary.
Intermediaries are special brokerage companies that carry out their activities in accordance with licenses. It is brokers who are able to open an account and earn profit on stock jumps.
Brokerage account: complex basics in simple words
Essentially, a brokerage account is similar to a bank account and is generally a safe place to place your funds. However, instead of being banked, it is protected by a broker or brokerage firm. Investors enter into agreements with brokers to deposit funds and use these funds to trade shares.
A brokerage or, as it is also called, a trading account is a type of account with which you carry out your personal transactions over the Internet based on personal research, plans, strategies and technical analysis. However, there are other types of brokerage accounts.
The classification of a brokerage account depends on the type of operations performed by it and the method of cooperation between the company and the investor, for example:
- Margin – allows you to invest in various securities with the ability to take a loan from a broker “on margin”.
- Cash is the simplest account with which you can immediately execute any transactions after the funds are credited.
- An individual investment account attracts with its opportunity to receive an annual tax benefit, although there is one nuance in the mode of its operation, within three years from the moment the account was opened, it is forbidden to close and withdraw money from it.
- Option – with its help, you can carry out transactions for the purchase and sale of options.
- A brokerage account allows you to buy and sell different types of investments. The most popular brokerages offer accounts that allow you to trade stocks, bonds, and exchange-traded funds.
Some brokers are adding the ability to participate in other financial markets as well, such as currencies, commodities, options, and even the most advanced asset classes such as cryptocurrencies.
Brokerage account: how can an investor make money on shares
Buying shares is the process of buying a piece of a particular company and entitles you to a percentage of any earnings it makes. The amount you can earn depends on what percentage of the profit each share is worth, how many shares you hold, and how well the company performs while you own its shares.
You may make more or less money than you originally thought, based on the company’s growth or earnings. Numerous factors affect the price of a stock, such as internal company changes, market influences, economic changes, government policies, and even the actions of other investors.
You are also entitled to a quarterly dividend, a share of profits that is not reinvested or otherwise spent on the improvement and development of the company. Keep in mind that if your priority is solely dividends, the success of your stock will not necessarily depend on its value.
Brokerage account: what to look for when choosing a reliable broker
The choice of a reliable broker is based on fairly simple criteria that must be carefully and calmly studied before the start of cooperation.
First, check for a license from the regulator (meaning the NBU or the Central Bank), such information is always published on websites and is available to absolutely every investor.
If you are offered to get acquainted with some dubious document of foreign origin, supposedly similar to a license or official permission, we do not recommend trusting your money to such a broker.
Second, be sure to specify how many years the company has been present on the brokerage market.
Thirdly, the company must have access to domestic and international platforms within one account.
Fourth, the availability of a transparent and diverse tariff plan, as one of the advantages of a reliable partner.
Fifth, check the company in the reliability rating, note that the ratings may be different, it depends on who they were compiled by. But the main criterion is that reliable companies will definitely occupy the first 10 positions.
The main disadvantage of investing in stocks is that they are much more volatile than investing in, for example, real estate or depositing money into a retirement or savings account. Trading volume fluctuates constantly, and other factors can cause stock prices to rise or fall rapidly.
If you are just starting to trade, you definitely need to plan for losses. They are almost inevitable, although you can minimize them by making good trades with care and patience.
If you’re feeling invincible or craving to take risks, just remember that mistakes can completely drain your portfolio or result in a million-dollar missed opportunity.
Regardless of how you plan to earn your profits, we recommend that you enlist the support and help of specialists, and develop a long-term profit plan with their help.
Diversify your portfolio, we always advise our clients not to keep “eggs in one basket” and invest in both domestic and foreign companies.
Analyze your trades, develop constantly to understand when is the right time to enter or exit a trade. Do not spare money for analytical data and professional assistance, because it is professional analytics that can bring the long-awaited profit.
And most importantly, beware of fraudulent transactions and carefully select partners.
A brokerage account (BA) is an account that is opened with a brokerage law firm or bank with the appropriate license. The main purpose of such an account is to buy and hold investments, including stocks, bonds, exchange-traded funds (ETFs) and mutual funds.
All investment assets are acquired by the broker on behalf of their client, and they are also sold and stored.