If you're just starting to think about investing, one of the first things you'll need is a brokerage account. But with so many different types available, it can feel overwhelming to decide which one is right for you.
Each
type of account serves a different purpose, whether you're saving for
retirement, investing for short-term goals, or setting aside money for a
child's future. This beginner-friendly guide explains the main types of
brokerage accounts in simple terms to help you make the best choice for your
financial goals.
1. Regular Brokerage Account (Taxable Account)
A regular brokerage account is the most common and simplest type of
account to open. It's also sometimes called a taxable account because you pay
taxes on any money you earn through it, like profits from selling stocks.
With this type of account, you can buy and sell things like stocks,
exchange-traded funds (ETFs), and bonds whenever you want. There are no limits
on how much money you can put in, and you can take money out at any time
without paying penalties. This makes it great for people who want flexibility.
Let’s say you buy a stock for £100 and later sell it for £150. That £50
profit is called a capital gain. If you held the stock for less than a year
before selling, the government taxes it at the same rate as your regular income.
But if you kept the stock for over a year, the tax you pay will be lower.
Example: Imagine Anna wants to try
investing in companies she likes, such as tech firms and fashion brands. She
opens a regular brokerage account, buys a few stocks, and decides to sell one
after a few months for a small profit. She gets to keep most of that profit,
but she'll pay a bit of tax on it when she files her tax return. That’s how a
regular brokerage account works.
2. Retirement Accounts: Traditional IRA and Roth
IRA
Retirement accounts are special types of brokerage accounts that are
designed to help people save for their future. Two of the most popular types
are the Traditional IRA and the Roth IRA. These accounts come with tax
benefits, which means they’re set up to help your money grow faster over time.
A Traditional IRA lets you put in money before paying taxes on it. This
reduces your tax bill now, but you’ll pay tax when you take the money out later
in retirement. A Roth IRA is the opposite: you put in money that’s already been
taxed, but when you take it out later, it’s all yours—tax-free.
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Example: Ben, who is 25 years old, starts
saving for retirement. He opens a Roth IRA and puts in £4,000 this year. That
money grows over time. When Ben retires at age 65, he can take it out without
paying any extra tax. Even if it has grown to £20,000, it’s all his.
Retirement accounts also have rules. You can’t take the money out before
you turn 59½ without a penalty, unless it’s for special reasons, like buying
your first home.
3. Work-Based Retirement Accounts: 401(k) and SEP
IRA
Some people save for retirement through accounts they get at work. The
most common is the 401(k). If your job offers one, you can have a part of your
salary automatically go into the account before taxes are taken out. Many
employers also offer to match some of your contributions, which means they add
extra money to your account for free.
Another type is the SEP IRA, which is great for people who are
self-employed or own a small business. It works similarly to the Traditional
IRA, but the rules allow you to put in more money each year.
Example: Peter works as a freelance web
designer. He doesn’t have a boss to offer him a 401(k), so he opens a SEP IRA
instead. He makes £40,000 a year and decides to put in a big chunk of it—about
£8,000—into his SEP IRA. He gets a tax break now, and the money grows for
retirement.
These accounts are great for long-term savings and usually come with big
tax advantages. But like other retirement accounts, you can't take the money
out easily until you're older.
4. Custodial Accounts: Saving for a Child’s Future
Custodial accounts are used by adults to save money for children. There
are two main kinds: UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform
Transfers to Minors Act). These accounts are opened in a child’s name, but an
adult—usually a parent—controls the money until the child reaches a certain
age, usually 18 or 21, depending on the laws where they live.
These accounts are often used to save for things like university or a
first car. The money can be invested in stocks and other things, just like in a
regular brokerage account.
Example: Sarah wants to save money for
her daughter Emma’s future. She opens a UGMA account and puts in £2,000. She
invests the money in a few mutual funds. Over the years, the money grows. When
Emma turns 18, the money becomes hers, and she can use it however she
wants—maybe to help pay for university or to buy a car.
Custodial accounts are taxed differently. The child may have to pay some
tax on the earnings, but the rates are usually lower than for adults.
5. Margin Accounts: Borrowing to Invest
A margin account is a special type of brokerage account that lets people
borrow money from their broker to buy more investments. This can lead to bigger
profits—but also bigger losses.
Using borrowed money to invest is called “buying on margin.” It’s a
high-risk strategy that’s usually used by more experienced investors. If the
investments do well, the investor can earn a lot more. But if things go badly,
they might lose more than just their own money.
Example: Tom has £5,000 in a margin
account. He borrows another £5,000 from his broker to buy a total of £10,000
worth of stocks. If the stock value rises, Tom makes more money than if he had
just used his own £5,000. But if the stock value drops a lot, the broker might
demand that Tom add more money to the account—or sell some of his stocks to
cover the loss. That’s called a margin call.
Margin accounts are powerful, but they are not recommended for
beginners. They require a deep understanding of investing and a strong ability
to manage risk.
Conclusion
Understanding the different types of brokerage accounts is an important
first step for anyone who wants to invest. Some accounts, like the regular
taxable account, are easy to use and very flexible. Others, like IRAs and
401(k)s, are designed to help people save for retirement and offer tax
benefits. Custodial accounts are great for saving for a child’s future, while
margin accounts are for advanced investors who want to borrow money to try to
earn more.
Choosing the right account depends on your goals, how much risk you're comfortable with, and how soon you want to use your money. Take your time, do a bit of research, and you’ll be better prepared to grow your money over time in a way that suits your life.
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