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Brokerage accounts
In the old days, a bank is where you kept your deposits and borrowed money. Banks had a reputation for the 3-6-3 rule: borrow at 3%, lend at 6% and be on the golf course at 3 p.m. A brokerage was a firm that sold you stocks and bonds. Nary did the two businesses meet.
Today, the distinction between banks and brokerages is getting harder to make as brokerages buy banks and banks buy brokerages. You can easily open a brokerage account at almost any online bank. A brokerage account lets you buy and sell mutual funds, stocks, bonds and other securities to help you manage your portfolio. You can also buy and sell securities for a retirement account.
The Securities Investor Protection Corporation (SIPC) insures brokerage accounts. However, SIPC insurance is not the same as deposit insurance, the insurance that the FDIC provides for most bank deposits. Instead, if you lose money buying and selling securities with a brokerage account, the losses are yours.
Neither does SIPC insurance protect you from investment scams. Instead, SIPC insurance protects you from brokerages that go out of business or have other financial difficulties. It's important that you are responsible for your own trading decisions and accept your losses as one of the risks of investing.
Having a brokerage account may give you additional flexibility to manage your finances. For example, if you use asset allocation as a part of your investing strategy, you will have to first build a portfolio of securities.
You will also have to occasionally rebalance your portfolio to maintain your target allocations. An online brokerage account helps you to move funds between bank and brokerage accounts, monitor your account's performance and aggregate your accounts for viewing and analysis.
Online banks offer a range of brokerage accounts for both new and existing customers. You can open an individual account or a joint account with your spouse. You can also open a custodial account with which you can manage the assets for a child or other beneficiary. You can also open a brokerage account to select the investments in an IRA. E-Sign lets you submit your signature electronically to authorize the opening of a brokerage account.
A brokerage account generally requires you to make a deposit before you begin buying securities. If you want to engage in short selling -- a practice that requires you to borrow shares from the broker -- you will have to open a margin account. You should consult a financial adviser before opening a margin account to learn about the risks of using a margin account.
Next, we summarize the insurance and regulatory protections you enjoy today with banking online.
Next Topic: Insurance & regulations
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