Brokerage Account: Meaning, Types and How it Works
Stock market investments require the participation of multiple market entities, one of which is a brokerage firm. Let’s understand the type of account that a brokerage firm offers.
What Is a Brokerage/Demat Account?
It is a type of account that you can open with a registered brokerage firm of your choice for trading. This account lets a brokerage place an order on behalf of the account holder. It is like a repository of an investor’s financial assets like stocks, bonds, mutual funds, and other investments.
This account works like a bank account where you must add money to invest in financial assets. You will also require a trading account to go with your brokerage account. Due to a highly digitised market space, it will take you a few minutes to open a brokerage account online.
Before starting your investment journey, it is important to understand which type of brokerage account is suitable for you.
How Do Brokerage Accounts Work?
First, you need to apply for a brokerage account with the brokerage firm. You need to fill in your personal details. To invest through a brokerage firm, you need to deposit the requisite funds into the account. You also need to direct the broker on which assets to invest in. After this, the broker is responsible for executing your orders.
Although the accountability rests on brokerage firms, the investor is the guiding force. The investor will receive notices of transactions and monthly statements electronically or on paper. A brokerage typically charges annual fees for providing the services and maintaining your account, brokerage platforms also charge a commission on every transaction.
Factors to Consider Before Choosing the Best Brokerage Account
If you wish to own the best brokerage account, it is essential to look for characteristics necessary for you. Here are some of the things that you can look for in your brokerage account:
- Low Cost
You should look for brokers that charge minimal commission for stock trading and levy minimal fees for account maintenance. This will help you save money and build the value of your investments.
Before opting for a brokerage account from a brokerage firm, check the ease of using their online trading system. Also, check how user-friendly the brokerage firm’s website is before selecting an ideal broking platform.
It depends from person to person as to whether you want to place a trade order via phone or online. You should check what the brokerage firm will offer if you open an account with them. Apart from this, you should also be aware of the customer service department and gauge their responsiveness.
How to Open a Brokerage Account?
You can easily open a brokerage account online. As we are now living in a digital age, this has become much easier. Here are the steps that you can follow if you wish to open a brokerage account:
Step 1: First, you need to select the broker of your choice.
Step 2: You need to visit the official website of the brokerage firm and start the sign-up process.
Step 3: Select the option that lets you open a Brokerage account. Make sure to select the type of brokerage account that you wish to open.
Step 4: You need to fill up your basic personal details for KYC, including name, address, Aadhaar number and PAN number.
Step 5: Pay the opening fees.
Step 6: Deposit money into the account and start investing.
You can also open account offline as well by visiting the branch office or agent of brokerage house.
What Are the Types of Brokerage Accounts?
Different brokerage firms offer multiple types of brokerage accounts, and each of them caters to a unique segment of investors. The types are as follows:
- Discount Brokerage Account
It is one of the prevalent types of brokerage accounts. This type of account is either low-cost or does not involve any cost at all. As this type of account is available at lowest opening charges, you will need to do everything starting from planning, research, selecting correct stocks as per requirement and placing trades.
- Margin Brokerage Account
In this type of account, the traders can borrow money from their respective brokers. The traders can then use this money to perform trades in advance, like shorting. Traders usually borrow this amount against collateral like existing cash and securities in their accounts.
- Cash Brokerage Account
This type of account requires investors to deposit funds in the account in advance for making purchases. Brokers do not lend any amount to traders. Therefore, it is known to be one of the most traditional types of brokerage accounts. It requires traders to settle purchases by a certain date.
- Self-Directed Brokerage Account
This type of account is suitable for investors knowledgeable about market conditions. The investors take investment decisions as per their research and create their portfolios accordingly. However, the brokerage firm provides some research tools to help the traders. The trader is responsible when it comes to carrying out purchases and sales of securities.
- Full-Service Account
The broker or service provider offers comprehensive financial services with this type of account, so the fee is relatively high. Financial advisers take all the responsibility and provide services that include research, planning, portfolio designing, security sales and purchases. The broker acts as the full-time financial advisor for the investor.
A brokerage account helps investors to execute trades in stock market. Opening a brokerage account online is simple.
Multiple brokerage firms are available in the market; therefore, you should choose one whose services suit you best. It is crucial to do thorough research to find a brokerage firm that fits your investment needs appropriately.
Frequently Asked Questions
Is it mandatory to have a brokerage account for investing in shares and IPO?
A brokerage account is crucial if you wish to invest in IPO, mutual funds, shares, and other assets; it acts as a single point of transactions.
Is it possible to have multiple brokerage accounts?
There are no limits regarding the number of brokerage accounts you can hold. No government regulations in relation to this or SEBI rules about this matter are present, and you can link the same PAN card number with multiple Demat accounts.
What is a Robo-advisor?
These automated financial tools are available on online platforms offering investment advice. These work on pre defined algorithms in backend.
Is it possible to transfer a brokerage account?
Yes, you can go for a brokerage account transfer if required. You can easily transfer it online if the new and old brokerage firms belong to the same central depository.