Idaho Finance

Sep 30 2017

How Brokerage Accounts Work? #brokerage #accounts


What Is a Brokerage Account?

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It s an esoteric topic but one that you should learn about if you have a margin brokerage account. Second, margin brokerage accounts can result in some weird things happening with the way you collect dividends on your stocks. If things don t work out exactly right, you might not qualify for the super-low dividend tax rates and, instead, be forced to pay ordinary tax rates which can be roughly double. Third, no matter how well you think you ve thought a position through, using margin can end in life-altering disaster. For example, late last year, I did a case study on my personal blog of a guy who went to bed with tens of thousands of dollars in net equity in his brokerage account and woke up to find he owed his broker $106,445.56. Many other individuals and families lost huge portions of their life savings, and in many cases, their entire liquid net worth or more, by purchasing shares of a company called GT Advanced Technologies on margin. It s not worth it. It s simple enough to get rich if you have a long enough period of time and you let compounding work its magic. I think it is a grave mistake to try to speed up the process to the point you risk destroying what you ve built.

For what it s worth, this is one of those areas where I put my money where my mouth is. I feel so strongly about it that in all but the most remote circumstances for very specific type of investors, Kennon-Green Co. my global asset management company, will require discretionary individually managed accounts to be held in cash-only custody. I don t care if widespread utilization of margin could make the firm more money due to the larger asset base on which we can charge investment advisory fees. the particular brand value investing, dividend investing, and passive investing we practice doesn t lend itself to borrowed money. It s a foolish risk and I want nothing to do with it.

Are There Any Limits To The Amount of Money You Can Deposit or Hold in a Brokerage Account?

There are no limits to the amount of money you can put into a brokerage account like there are with a Roth IRA or 401(k) and, thus, there are generally no restrictions on when you can access the money unless you buy some sort of restricted security or asset. Depending upon your personal tax situation and the type of assets you hold in the brokerage account, you may owe capital gains taxes, dividend taxes, or other taxes on your holdings.

One thing you may want to consider is the financial strength of your broker and the extent of SIPC coverage. This is the insurance that kicks in and bails out investors when their stock brokerage firm goes bankrupt. Different types of assets have different levels of coverage, and some have no coverage at all. Another alternative is to consider using a brokerage firm to execute trades but holding your securities through the Direct Registration System, or DRS .

Is There a Limit to the Number of Brokerage Accounts I Can Have?

No. There is no limit to the number of brokerage accounts you are allowed to have. In fact, you can have as many, or as few, brokerage accounts as you want and as institutions will permit you to open. You can have multiple brokerage accounts at the same institution, segregating assets by investing strategy. You can have multiple brokerage accounts at different institutions, diversifying your relationships and exposures.

What Is the Difference Between a Discount Broker and a Full Service Broker?

A full service brokerage account is a special type of brokerage account where you work with a dedicated broker who knows you, your family, and your financial situation. You can pick up the phone and speak to him or her. You can walk into his or her office and regularly have meetings and discuss your portfolio.

Part of the compensation for these sorts of arrangement typically comes from trading commissions so instead of paying rates of $5 to $10 at a discount broker per trade, you might pay anywhere from $40 to $150 depending upon the circumstances. While this increases costs, there are some who argue that it also encourages investors to hold their positions longer and stay calm during market collapses by having someone to hold their hand. You will have to make a decision for yourself which approach works better for your temperament.

A discount broker, in contrast, is generally online-only these days, perhaps with a few branch offices around the country. Everything is pretty much do-it-yourself and you have to execute your own trades.

Some financial institutions offer both models. To learn more, read Is a Full Service Broker Right for You? .

More Information about Stock Brokers and Brokerage Firms

This is part of our beginner s guide to stock brokers and brokerage firms. which contains a wealth of resources for new investors trying to understand how to choose a stock broker, how to read a trade confirmation, and much more.

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