What Is a Brokerage Account? A Comprehensive Guide

For every financial asset investment, you need a special account to invest from—a brokerage account.

As an aspiring do-it-yourself investor, understanding what a brokerage account is and how it works is crucial for success. If you choose the wrong brokerage account, you may lose part of your investment profit in fees and miss out on opportunities. You can even experience something worse.

For instance, Abimbola, an aspiring investor like you, lost his life savings of over $67,000 after depositing into a fraudulent brokerage account. To avoid this kind of misfortune in your investments, this article will walk you through:

• What a brokerage account is all about
• What it is used for
• And how it works.

When you understand these fundamentals, you can confidently choose a good brokerage account and go about investing the right way.

What is a brokerage account?

A brokerage account is a type of account from which you can buy and sell financial assets such as stocks, bonds, index funds, mutual funds, and ETFs. It’s also known as an investment account or a securities account.

Normal bank accounts don’t offer such investment options, because they aren’t designed for it. Hence, you must use a brokerage account to profit from the financial markets.

Brokerage companies issue brokerage accounts. These companies are similar to banks in Nigeria, but they only specialise in giving investors access to the financial markets.

When you want the Central Bank of Nigeria (CBN) to help you store your money, you can’t go directly to them. You have to deposit the money in a commercial bank like Zenith Bank. Then Zenith Bank remits the money to the CBN.

This is similar to what happens in the financial markets. When you want to buy stocks, you can’t go to a stock exchange directly. You pass through a brokerage company.

Brokerage companies serve as middlemen between you and the financial markets. Here’s a list of top licensed brokerage companies in Nigeria.

What is a brokerage account used for?

Depending on your investment goals, a brokerage account can serve several purposes. Let’s consider them.

1. To buy and sell securities

Securities are financial assets such as stocks, bonds, and mutual funds, among others. The primary function of a brokerage account is to enable you to buy and sell these securities to help you make a profit.

For example, you’ll need a brokerage account to buy and sell Dangote stocks from the Nigerian Stock Exchange (NSE).

The brokerage company running the account enables such transactions by serving as a middleman between you and the NSE.

2. To provide a safe and centralised location for holding investment assets

A brokerage account can serve as a savings account where you store all your financial assets. The Securities and Exchange Commission (SEC), a Nigerian government institution, registers and regulates brokerage accounts in Nigeria. Therefore, your investment capital is safe when you leave it in a registered brokerage company.

3. To diversify investment portfolios

Top investment experts, like Roger Wohlner, believe in the diversification of funds when investing. Imagine that you want to diversify your investment by buying small amounts of several stocks, bonds, and mutual funds.

You can buy each of these investment options from a brokerage account. Most brokerage accounts offer a variety of investment assets.

4. To participate in the financial markets and in the global economy

Apart from investing in local financial assets in Nigeria, brokerage accounts allow you to invest in global financial assets.

For example, you can invest in the stocks of global companies such as Google (GOOGL), Apple (AAPL), and Microsoft (MSFT). The names in brackets represent the symbol (ticker) for identifying these companies on the stock market.

5. To access investment research reports and analyses from brokerage firms

Brokerage companies usually share investment research reports and analyses with their customers. You easily get these reports and analyses if you have a brokerage account with such companies.

Investment research and analysis are useful for making informed investment decisions.

6. To engage in long-term and short-term investing

Brokerage accounts are flexible in that you can use them for long- and short-term investments. Short-term investments last for a few days or weeks, while long-term investments can last for months and years.

7. To monitor assets

Brokerage accounts provide a screen on which you study and observe the changes in the prices of financial assets. Assuming you want to buy a stock, you can watch as the price approaches your target spot. That way you’re not buying blindly.

After you’ve bought the stocks, you can monitor how your investment is going through your brokerage account. That way you can determine the exact price to sell your investment. You can also understand if your investment is appreciating or depreciating.

How does a brokerage account work?

It’s not as complicated as you may think.

First, you need to create an account by visiting your preferred brokerage company’s website. After you’ve created the account, fund it by adding naira or any required foreign currency using your bank card.

Once you’ve decided on the financial assets to invest in, buy and hold (keep) them in the brokerage account. Whenever you need the money from your investment, sell the assets in your brokerage account.

Next, request the brokerage company to pay the money from your brokerage account into your bank account.

Types of brokerage account

There are several types of brokerage accounts, each designed to meet a specific investment need. Below are the common ones:

1. Individual brokerage account

An individual brokerage account is one that only you can have access to. It’s designed for one person to operate.

This type of account is similar to your personal bank account. No one has access to it, and you decide how you want to use it. An individual brokerage account is best if you want privacy in managing your investment assets.

2. Joint brokerage account

In a joint brokerage account, two or more people pool money together to invest as a team. Every participant in the team has access to the account.

This account is similar to the joint bank account you create with family or friends. And it’s best for couples, family members, or people who have things in common.

3. Retirement brokerage account

A retirement brokerage account is for people who want to invest for their retirement. This type of brokerage account is similar to the normal fixed deposit account. You can’t withdraw money from the account without incurring a heavy penalty in fees.

The fees are meant to discourage you from withdrawing from it until you reach your retirement age.

4. Custodial brokerage account

A custodial brokerage account is one you open for someone who is under the age of eighteen (a minor) according to the law. An adult takes charge of the account until the minor comes of age.

This kind of account is best for parents or guardians who want to secure their children’s financial future. So, you gradually invest in their name, until they are old enough to take charge of the account.

5. Trust brokerage account

A trust brokerage account is similar to a custodial account. But in this case, instead of you, a third party manages the account on behalf of the beneficiaries.

With legal protection, the third party is bound to act accordingly even when you’re not there. For example, you can create a brokerage account on behalf of all your children. You invest a certain amount and ask a professional to manage it since you’re not good at financial investing.

6. Corporate or business brokerage account

A business or corporate brokerage account is one you open in your business name. With this type of account, you can invest the surplus profits you make from your business or even manage your employee retirement plans through it.

7. Margin brokerage account

A margin brokerage account is a trading account. The outstanding thing about a margin account is that it’s a debt account. That is, it lets you borrow money from your brokerage company to invest or trade. But it comes with interest and a risk of losing all your capital (collateral). It’s similar to taking a loan with collateral from a normal bank account.

This kind of account is best for financial market traders looking to make big profits with little money. But it carries a significant amount of risk that we wouldn’t recommend it to beginners.

Note: Every brokerage company has one or more of these account types. To find out the account type available in a brokerage company, visit their websites.

How to choose the best brokerage account

I. Do your research

Investing is risky. You don’t want to bet your money on what someone else has told you. You should verify and confirm investment information to avoid losing your money.

And where should you look when doing your research?

• Search online to understand what fellow Nigerians are saying about the brokerage company. For instance, you can search [company name] + Nairaland on Google.
• Check the brokerage company’s website to read and understand their services.
• Check the Securities and Exchange Commission (SEC) website.

Now that you understand where to look, here are questions you should find answers to:

• Is the brokerage company registered with the Securities and Exchange Commission (SEC)?
• Does the company have a verifiable physical address?
• Does the company have a customer support service? If yes, how fast can they attend to you?
• How much do they charge in fees, commissions, or interests?
• What are the tax payment terms?
• How easy is it to deposit and withdraw funds?
• What is the reputation of the top executives of the company?
• Has the company had an excellent track record?

II. Consider your circumstances and investment goals

To choose the best account that suits your needs, you should find out why you’re investing in the first place.

• Is it for yourself, your family, your kid, or your business?
• Are you investing for retirement or to meet a future goal?

When you’ve decided on that, you will easily know the best account type to pick.

You can always refer back to the section on account types to pick the most suitable account for you.

How to open a brokerage account

Opening a brokerage account is straightforward:

1. Research to understand different brokerage companies and how they operate.
2. Choose one of the brokerage companies.
3. On the company’s website, decide on the type of brokerage account to open. This should be based on your needs.
4. Create an account and provide all the necessary means of identification required.
5. Fund the account and start investing.

Best brokerage companies for beginners

Choosing a great brokerage company is essential when you’re starting. If you choose the wrong one, you may have a bad experience that discourages you from ever investing again.

Bearing that in mind, the following are important factors to consider before making your choice. They include:

• Minimal fees and commissions
• User-friendly interface
• Fast and efficient customer support service
• Low account minimums
• Varied investment options or assets
• Availability of mobile apps
• Registration with SEC Nigeria
• Presence of various account types
• Good reviews from other users
• Strong security measures to protect investors’ funds
• Presence of demo accounts for test trading
• Access to research tools.

The Nigerian exchange group publishes the top 10 brokers by trading volume and value. From the recent January to October 2023 data, we’ve picked the best brokerage companies for a beginner.

While selecting these brokerage accounts, we considered the factors to look out for in a brokerage company as we mentioned earlier. Here are 3 brokerage companies to invest in local Nigeria financial assets as a beginner:

1. Cardinalstone Securities Limited
2. Apt Securities and Funds
3. Stanbic IBTC Stockbrokers LTD.

Here are 3 brokerage companies to invest in global financial assets as a beginner:

1. Trove
2. Bamboo
3. Chaka.

Brokerage account vs trading account

A brokerage account and a trading account are sometimes used interchangeably. But generally, a brokerage account involves various investment activities in scope, while a trading account focuses more on the frequent buying and selling of assets in a short time.

To put it simply, all trading accounts are brokerage accounts. A brokerage account can be used for both short-term (trading) and long-term investing.

Brokerage account vs savings account

Idea for comparison	Savings account	Brokerage account
Account purpose	For saving cash and earning interest	For investing in financial assets
Return on investment	Yields little interest and is risk-free	Has the potential to earn high profit but at high risks
Mode of opening	Can be opened with any bank in Nigeria	Can only be opened with a brokerage company
Fees	Little or no fees	Charges fees as trading commissions
Minimum account balance	Little or no money in the account	Depends on the brokerage company
Insurance	Insured by the Nigerian Deposit Insurance Corporation, NDIC, a government financial regulator	Not insured by NDIC

Brokerage accounts FAQs

1. Is a brokerage account a bank account?

No, a brokerage account is not a bank account. A bank account is for depositing, saving, withdrawing, and managing money. A brokerage account is for investing in financial assets such as stocks and bonds.

2. What does a brokerage account do?

A brokerage account helps you buy and sell financial assets such as stocks, bonds, and more. Such investments can be long-term or short-term.

3. Can you withdraw money from a brokerage account?

Yes, you can withdraw money from a brokerage account. But first, you must send withdrawals from your brokerage account to your bank account before you can get the cash.

4. What is the best brokerage account?

The best brokerage account depends on your needs. For instance, if you want an account for your personal use, an individual brokerage account is the best for you. For someone who wants to invest with their partner, a joint brokerage account is great. But if you’re thinking of investing now to take care of yourself when you retire, then a retirement brokerage account is for you.

Conclusion

The first steps to successful financial asset investing include understanding what a brokerage account is, how it works, and how to choose the right one. Once you understand these, you’re starting on the right path to success with investing.