What is a brokerage account and why you should open one

2024 Author: Malcolm Clapton | [email protected]. Last modified: 2023-12-17 03:44

You will not be able to enter the stock market without it.

What is a brokerage account

A brokerage account is an account through which individuals can buy and sell stocks, bonds and other financial instruments on the stock markets.

According to the law, only legal entities, that is, brokers, are entitled to directly participate in trading. Therefore, if you want to transact in the stock markets, you need an intermediary.

The legal requirement was implemented in the following infrastructure: exchange - broker - you. Such a three-stage system allows distributing systemic risks among a large number of market participants, creating competitive services at the broker level and “saving” the exchange from communicating with millions of individuals who trade on it.

Vitaly Kirpichev Development Director in Russia TradingView, Inc.

A broker's account is needed so that you can credit money to it, and the broker takes them from there when, on your behalf, conducts transactions in the stock market. In the other direction, it works in the same way: the broker sells, for example, shares on your behalf, and returns the money to the account.

How a standard brokerage account differs from an IIS

Individual investment account (IIS) is a variant of a brokerage account for which special conditions apply. In particular, unique tax deductions can be obtained. But there are also additional restrictions.

The significant differences between the two accounts are as follows:

• You can transfer up to one million per year to the IIS, there are no restrictions for a brokerage account.
• You can freely withdraw money from a brokerage account, in the case of IIS - no, this will mean closing the account. At the same time, in order to take advantage of tax deductions, the IIS must exist for at least three years.
• For IIS, the set of financial instruments available for purchase is limited by law, for a brokerage account - no, it all depends on the broker.

How secure are brokerage accounts

A depository account is usually opened in a pair with a brokerage account. It stores all your assets electronically. If something goes wrong with the broker, you will retain the rights to your securities and can transfer them to the depository of another broker. Or open a new brokerage account, if the depository was originally opened with another legal entity.

But there is a risk of losing money from a brokerage account if the broker goes bankrupt or gets into other troubles, because insurance is not provided. So it is worth choosing a trusted intermediary and not keeping large amounts in a brokerage account, but transferring money into assets.

How to open a brokerage account

You will have to go through a few steps.

1. Choose a broker

This is a very crucial stage. The security of your finances will depend primarily on it. There are several criteria by which you need to evaluate your future representative on the exchange: for example, does he have a license, how long has he been on the market and which exchanges he provides.

Many companies are ready to enter into online service contracts. This is an option for those who are used to doing everything remotely.

Brokerage services are often offered by banks through their subsidiaries. So it is not necessary to choose from the companies that you see for the first time, you can trust a familiar brand.

2. Determine the type of account

Ordinary brokerage or IIS. If you want to use tax deductions and are ready not to withdraw money for three years, you can consider IIS. If you need more freedom, a standard brokerage account is better suited.

3. Choose a tariff

Brokers usually offer different options depending on how actively you trade in securities. Generally, if you're just starting out, something simple and cheap will do. You need time to understand how everything works, so there is no point in overpaying yet.

4. Prepare documents

To open a brokerage account, you will need:

• passport;
• tax registration certificate (TIN);
• insurance certificate of compulsory pension insurance (SNILS).

You will also be asked to fill out an application and a company form.

What else is a brokerage account useful for?

You cannot trade on the stock exchange without a brokerage account, so you cannot do without it if you plan to invest in securities available on stock exchanges. However, it can be useful not only for this.

Any person who plans to create their own capital should open a brokerage account. With its help, you can not only buy and sell securities, but also, for example, perform exchange operations with currency at the exchange rate, which is often more profitable than at a regular exchange office.

Evgeny Marchenko Director of E. M. FINANCE