If you’ve ever considered growing your wealth to save up for retirement or scooping up some short-term profits by trading, you have probably come across the concept of brokerage. In this article, we’ll show you the basic aspects of online brokerage firms, such as what is a brokerage account, how to open a brokerage account, or what are brokerage fees.

Let’s dive into the details and start with the definition of a brokerage firm.

Broker 101 - What is a broker, brokerage accounts and more
What is an online broker?

To give you a simple broker definition, we can say that a broker is a “middleman” that matches buyers and sellers. For this service, brokers receive a payment, usually called a commission.

For example, if you want to sell your house, you can hire the services of a broker (in this case, a real estate agent) to find a buyer, instead of going out and trying to find a buyer on your own. After the house is sold, the broker gets a payment, either a fixed fee or a percentage of the sales price.

The same thing happens when you invest or trade on financial markets. The main task of a broker is to execute your transactions. Traditionally, we would think of a broker as a person standing on the stock exchange trading floor and frantically yelling “buy” or “sell” while looking at big TV screens flashing numbers and charts. But as a result of technological advancement, nowadays most brokers are online brokers. This means you can invest or trade on your own, online through your computer or smartphone.

Using a brokerage account at an online broker is not the only way to tap into financial markets. Other options include choosing a robo-advisor or hiring a private financial advisor. Below is a high-level comparison of these solutions:

Online brokers vs other forms of investment/trading solutions
  Online broker Robo-advisor Private financial advisors

Your involvement

High

Limited

Limited

Technology used

Trading platform, execution system

Algorithm invests automatically

Nothing special

Costs

Commission, spreads, other fees

Yearly % fee, usually up to 0.5%

Yearly % fee, usually over 1%

In general, online brokerage accounts require the most engagement and activity from your side, as you need to do everything on your own, from coming up with a trading idea up until order execution. Robo-advisors use a proprietary algorithm to invest in assets (usually in ETFs), based on your risk preferences and investment goals. Meanwhile, private financial advisors may be ideal if you need more help with starting your investment journey and would prefer to talk with an investment professional regularly.

If you consider all factors and decide to use the services of an online broker, the first step is to open a brokerage account. So let’s see what is a brokerage account and how to open a brokerage account.

 

Broker 101 - What is a broker, brokerage accounts and more
What is a brokerage account?

A brokerage account enables you to trade financial products directly using the broker’s own trading platform or third-party platforms. You can usually choose from a wide range of account types, including non-margin or margin accounts, tax-advantaged accounts, or account types based on ownership. Here’s a high-level overview of the most common account types.

A) Account types based on whether you’re allowed to trade on margin

  • Cash account - you need to have sufficient cash to cover the entire position when you initiate a trade.
  • Margin account - margin trading enables you to borrow money from the broker for your trades, thereby easily increasing your buying power. However,  margin trading may also involve significant risk. Margin accounts in the US require a $2,000 minimum account balance.

B) Account types based on ownership

  • Individual account - the account is owned by an individual.
  • Joint account - the account is owned by two or more individuals.
  • Company account - the account is owned by a legal entity.
  • Minor / custody account - the account is opened on behalf of an underage person. This is ideal if you’d like to open a brokerage account for your child. This account type is very common in the US and Canada but less so in Europe.

C) Special account types

  • Tax-advantaged accounts - many brokers, especially stockbrokers, offer tax-advantaged accounts, such as IRA in the US or ISA in the UK. These accounts allow you to invest on financial markets without having to pay taxes such as capital gains or dividend taxes.
  • Islamic / swap-free accounts - when you trade forex, CFDs or other derivative products, you usually have to pay financing rates or swap rates for holding your position overnight. These are considered equivalent to paying interest, which is forbidden by the Islamic religion. To accommodate Muslim traders, some brokers offer accounts that charge an administration fee rather than swap rates.

 

There are several brokerage firms where you can open an investment account in a matter of minutes. Let’s see how to choose a brokerage account.

Broker 101 - What is a broker, brokerage accounts and more
How to choose a brokerage account?

Today, with just three clicks online, you’ll find a wide selection of brokers that are more than happy to be at your disposal when it comes to managing your money. It’s quite easy to find online brokers where you can open an account, but in the next step, you’ll face a more challenging task: choosing the right one.

We recommend following these six steps when choosing a brokerage account:

1. Goal setting

Think about your broader investment or trading goals and preferences, such as how much money you can put aside, or how much and what kinds of risk you are willing to take.

2. Asset class selection

Pick a few asset classes, like stocks or ETFs, that can support this goal.

3. Broker filtering

Filter for brokers that are available in your country and offer the selected asset class(es). This broker comparison table will help you with this.

4. Filter for other selection criteria

Also think about other factors, such as what regulation or investor protection or what fee levels you would be comfortable with. In our experience, and based on our research, the most important ones among these factors are fees, broker safety, account opening, and deposit/withdrawal options.

5. Do your research

We highly recommend that you do thorough research before picking a brokerage account. You can find detailed information about each broker in our broker reviews.

6. Open and test one or more brokerage accounts

Once you have narrowed down your options, we suggest you test these brokerage accounts. Many brokers offer a demo account, which is a great way to get a feel for the trading platform. In this broker comparison table, you can filter for brokers that have demo accounts.

If you feel lost in the process, our broker recommendation tool can help you select the best brokers for your preferences.

Broker 101 - What is a broker, brokerage accounts and more
How to open a brokerage account?

You can effortlessly open a brokerage account from the comfort of your living room. At most brokers, it takes less than a day. However, at some brokers, especially at more established stockbrokers, the account opening process can be a bit more cumbersome, and it can be several days before your account is ready for trading.

In general, the account opening process includes the following six steps:

1. Personal information

Add some personal information, such as your name, email address, country of residence, date of birth etc.

2. Financial and employment status

Answer questions about your financial situation and employment status.

3. Investment / Trading experience

Fill out a financial quiz or answer some questions about your investment and trading experience. If you would like to trade more complex and riskier products such as derivatives, your broker may require that you have a certain amount of trading experience.

4. Set up your account

At most brokers, you can choose from several account types, trading platforms and account base currencies. You usually need to select these parameters during the account opening process.

5. Verify your identity and address

At the end of the account opening process, brokers are required to go through a so-called KYC, or know-your-customer procedure. This means that you have to verify your identity by uploading one of the following documents:

  • National ID
  • Passport
  • Driver’s license

In addition, you need to verify your address by uploading one or more of the following

documents: 

  • Bank statement
  • Utility bill
  • Residency ID

6. Make a deposit if there is a required minimum amount

At most brokers, you can start using your account without an initial deposit, but some brokers may require a minimum deposit of as much as several thousand dollars to open your brokerage account. If the broker requires a minimum deposit, you need to transfer the amount before you can start investing or trading. 

Once you have opened your account, you can start your journey and place orders on the brokerage platform, e.g. buy or sell stocks. The range of available investment products depends on the type of broker you signed up to  - it can be a stockbroker, CFD broker, forex broker, or options/futures broker. Let’s now check out these different broker types.

Broker 101 - What is a broker, brokerage accounts and more
What is a stockbroker? What other broker types exist?

In the brokerage universe, stockbrokers are the most common and popular type. In our definition, the term stockbroker covers online brokers that provide a wide range of asset classes, such as stocks, ETFs, options, and so on. Stockbrokers can fall into one of the following categories:

  1. Full-service stockbroker: a broker that provides a wide range of services, from advanced research tools to a deep product selection and access to many exchanges all over the world. Some full-service stockbrokers charge relatively high fees in exchange for offering such a complex selection of services, but many full-service stockbrokers actually charge quite competitive commissions for some or all of their services. To learn more, check the best online brokers here.

  2. Discount stockbroker: these brokers’ main selling point is low-cost (or even free) trade execution, but the trade-off is that other services, such as advanced research or educational tools, are often not available. To learn more, check out our picks for the best discount brokers.

The most important fees charged by stockbrokers are commissions. One of the biggest trends in the brokerage industry right now is that of commission-free brokers. However, upon closer inspection of their execution practices, it’s not always clear that trading at these brokers is actually really “free”.

Many commission-free brokers earn revenues by selling your orders to market makers and receiving rebates in exchange, a practice called payment for order flow (PFOF). This can create a serious conflict of interest between you and the broker, as the broker might prefer routing your orders to a market maker that provides the highest rebate, not the one that provides the best execution. Because of this, PFOF practices are banned in some countries such as the UK or Canada.

What does a stockbroker do?

Stockbrokers buy and sell securities on your behalf, and in some cases give advice on when and where to invest. Full-service stockbrokers often have a dedicated research team that monitors financial markets and the wider economy, and use their expertise to provide their clients with recommendations on what they consider to be the best investing options.

Stockbrokers have access to the biggest financial markets such as the NASDAQ or the New York Stock Exchange. As a retail client, you cannot have such direct access, and an intermediary is necessary between you and the stock exchange - and that’s what a stockbroker is, an intermediary where you can place your trading orders.

So, in short, your stockbroker implements your investment decisions - but does not make those investment decisions for you.

What other broker types exist?

In addition to stockbrokers, there are brokers that specialize in one asset class, such as CFDs or forex. Available asset classes at these brokers are often very limited, and the structure of their fees also differs. The following table compares the most typical broker types.

Stockbrokers and other broker types
  Stockbroker Forex broker CFD broker* Futures/Options broker

Available asset classes in general

Wide range of asset classes, e.g. stocks, ETFs, bonds, funds, options etc.

Limited to currency pairs, stock index CFDs and commodity CFDs

Limited to stock CFDs, forex CFDs, stock index CFDs, commodity CFDs, bond CFDs, ETF CFDs, and sometimes real stocks/ETFs

Limited to futures and options

Most typical trading fee

Commission

Commission for forex, spread for others; financing rates / swap fees

Spread and financing rates / swap fees

Commission

Examples

Interactive Brokers, DEGIRO

Oanda, Fusion Markets

XTB, Capital.com

NinjaTrader, tastyworks

*CFDs are banned in the US

As you can see, these broker types differ in pricing. Stockbrokers rely mainly on commissions, while CFD brokers focus on spreads. Let’s take a closer look at the various trading and non-trading broker fees.

Broker 101 - What is a broker, brokerage accounts and more
What is a broker fee?

When you decide to open a brokerage account at a broker, one of the first things that will come to your mind is, “how much will it cost me?” First, let’s see what are the most common broker fees when you invest or trade:

  • Commission: it is charged when you execute a trade (either buy or sell). Commissions can be volume-tiered or flat.
  • Spread: it denotes the difference between the bid (sell) and ask (buy) price. When you trade forex or CFDs, spreads can make up a significant part of your trading costs.
  • Overnight cost / financing rate / swap fees: if you trade on leverage, you may be charged for holding your positions overnight. This cost can be expressed as a percentage or in swap points.
  • Currency conversion: if your brokerage account is denominated in a different currency than the asset you trade, a conversion fee will be charged. For example, if you hold a EUR account and trade US stocks, your cash needs to be converted into USD.

Please keep in mind that currency conversion can also occur when you deposit to a broker account in a currency other than your bank account’s currency. In this case, it is your bank that will charge a currency conversion fee. To avoid this, there are many digital banks out there that provide great conversion rates.

  • Custody fee: your assets are held in the custody of the broker. Some brokers charge a fee for this service. It’s usually a yearly % fee of the value of your assets.

The type of broker fees you’ll face and the actual answer to your question “How much will it cost me?” will depend on three factors:

1. Your trading strategy

If you’re a day trader, you’ll definitely be more concerned about broker fees than long-term investors, as you’ll be carrying out a lot more transactions. Whichever strategy you choose, you’ll want to pick a reliable and established broker. You can check our broker analyses here; all of these brokers are regulated by at least one top-tier financial authority.

2. The broker type you select

A full-service broker will offer you a wide range of services, but broker fees are also likely to be higher. If you focus only on simple trade execution, a discount broker may be a better choice for you. Please refer back to the previous section to understand the difference between these broker types.

3. The asset you’re trading

Different asset types come with different pricing structures. For example, commission is the most typical fee for stocks, while spreads are the basic cost element for forex trading. We listed the most typical fee elements for each asset class in the table below.

Broker fees for different asset classes
  Are commissions common? Are spread mark-ups common?* Are overnight costs common? Are custody fees common?

Stock

Yes

No

No

Yes

ETF

Yes

No

No

Yes

Forex

Yes

Yes

Yes

No

Fund

Yes

No

No

Yes

Bond

Yes

No

No

Yes

Options

Yes

No

Yes

No

Futures

Yes

No

Yes

No

CFD

Yes

Yes

Yes

No

*A spread, i.e. the difference between bid (sell) and ask (buy) prices, occurs in all trades. However, brokers often mark up spreads, i.e. make the spreads wider, for some asset classes such as CFDs.

In addition to trading fees, you should also keep an eye on non-trading fees. Let’s see what these are in more detail.

Non-trading broker fees

Many brokers charge fees that are not related to trading, but instead are levied on other activities such as deposits or withdrawals. The most typical non-trading fees are the following:

  • Deposit fee: this fee is charged when you deposit money to your account. Most brokers don’t charge a deposit fee. When they do, it’s usually charged for transfers via credit/debit cards or electronic wallets (such as PayPal).
  • Withdrawal fee: it is charged when you withdraw money from your broker account. The withdrawal fee depends on the method of withdrawal. For example, wire transfer withdrawals at US brokers are often very expensive, costing up to $50 per withdrawal. However, there are many brokers that don’t charge anything for withdrawal; you can check them in our broker comparison table.
  • Inactivity fee: this fee is charged if you don’t do any trading for an extended period. Brokers that charge such a fee typically apply it after one year of inactivity. In most cases, though, no inactivity fee is charged if you don’t hold any cash on your account.
  • Account/platform fee: this fee is charged simply for maintaining your account. Not too many brokers apply this fee; when they do, it is usually charged monthly. There are brokers that charge a monthly account fee of up to $10.

To learn more about various broker fees, read this article.

Broker 101 - What is a broker, brokerage accounts and more
Bottom line

Selecting an online broker is one of the most important steps in your investment journey. You can choose from several broker types, such as full-service stockbrokers, discount brokers, forex brokers and more.

Online brokers will help you execute your buy/sell orders on the market. For doing so, they will charge various broker fees. This can be a commission, spread or financing rate, among others.

Before you select a broker and open your brokerage account, we highly recommend that you do extensive research, as fees, trading platform quality, product selection and other factors really do make a big difference when it comes to your investment/trading experience and results.

Sounds complicated? These detailed broker reviews, broker comparison table and broker recommendation algorithm can help you find the right broker!

Author of this article

Ádám Nasli

Author of this article

Ádám is a motivated finance expert with over two years of experience in banking and investment, and a professional degree in this field. He's eager to help people find the best investment provider for them, and to make the investment sector as transparent as possible.

Ádám Nasli

Broker Expert

Ádám is a motivated finance expert with over two years of experience in banking and investment, and a professional degree in this field. He's eager to help people find the best investment provider for them, and to make the investment sector as transparent as possible.

Everything you find on BrokerChooser is based on reliable data and unbiased information. We combine our 10+ years finance experience with readers feedback. Read more about our methodology

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