What Is a Brokerage Account?

A brokerage account is an account held at a registered broker-dealer that lets you buy, hold and sell securities. Two distinct things are happening: the firm executes your orders in the market, and the firm holds the resulting assets on your behalf. Most confusion about brokers comes from collapsing those two functions into one.

How it differs from a bank account

A bank account is a debt: you lend the bank money and it owes you the balance. FDIC insurance covers that debt up to a limit if the bank fails.

A brokerage account is custody: the securities are yours, and the broker holds them for you, typically in street name — registered to the broker but beneficially owned by you. If the broker fails, the assets are not part of its estate. SIPC exists to handle the case where they nonetheless go missing.

What the broker actually earns

With commissions at zero across most of the US market, brokers earn from other sources. The main ones are net interest on uninvested cash balances, securities lending, margin lending, payment for order flow on routed orders, per-contract options fees, and subscription products.

None of that is hidden — it is disclosed — but it explains behaviour that otherwise looks strange. It is why a broker may sweep your cash into a low-yielding account by default, why margin is offered prominently, and why options carry a per-contract fee when stocks do not.

The account types you will meet

• Individual taxable — the standard account. No contribution limits, no withdrawal restrictions, and gains are taxable in the year they are realised.
• Joint — held by two people, usually spouses. Not offered by every broker.
• Traditional, Roth and rollover IRA — retirement wrappers with contribution limits and withdrawal rules, and different tax treatment from each other.
• SEP and SIMPLE IRA, solo 401(k) — retirement wrappers for self-employment income, with much higher contribution limits. Offered by relatively few brokers.
• Custodial — held by an adult for a minor.
• Margin — a taxable account with borrowing enabled. It is a feature applied to an account, not a separate account type.

Which of these a broker offers is not a minor feature difference. It determines whether the firm can serve you in five years, and it is one of the four things we score.

Cash inside a brokerage account

Uninvested cash usually sits in a sweep arrangement — either a money market fund or a bank deposit programme. This matters for two reasons. The yield varies enormously between brokers and default options. And the protection differs: cash swept into an FDIC-insured bank deposit is covered by FDIC rules, while cash awaiting investment at the broker falls under SIPC's $250,000 cash sublimit.

Check the default sweep option when you open any account. It is one of the few settings that costs you money continuously if you leave it wrong.