The post Brokerage Account vs. Mutual Fund by Benzinga Contributors appeared first on Benzinga. Visit Benzinga to get more great content like this.
Brokerage accounts offer more flexibility and control over individual investments, while mutual funds offer diversification and professional management for a hands-off approach to investing.
Before you start investing, you’ll have to nail down some key terms and concepts, including the differences between a brokerage account and a mutual fund account. Read on to learn the difference and how each plays a part in your investing strategy.
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What is a Brokerage Account?
A brokerage account is a type of investment account that allows you to buy and sell stocks, bonds, mutual funds, ETFs and other types of investments. Brokerage accounts are typically opened with an online broker or a traditional stockbroker, and they can be used to create a diversified portfolio to help you reach long-term financial goals. With a brokerage account, you have access to research and tools to help you make informed investment decisions.
Full-Service vs. Discount Broker
The type of broker you sign up with will determine the services available to you.
An account at a discount broker would likely have low commissions but not much customer service.
A full-service brokerage offers more services and could potentially give you access to anticipated initial public offerings (IPOs) if you have a big account or use its services a lot.
Choosing a Margin or Cash Account
Two types of broker accounts are generally available: a cash account and a margin account.
Investors using cash accounts must wait three days until a transaction settles before initiating another transaction.
If you’re using a margin account, the brokerage loans you money and allows you to do the transaction instantaneously. You must pay interest that you borrow, which at most brokerages is generally 7% or higher for accounts less than $100,000. You can short in a margin account but not in a cash account, but shorting is considered dangerous.
Day traders must have at least $25,000 or they will run into the pattern day-trading rule that prohibits them from making more than three round-trip trades in one week.
Different Types of Securities You Can Buy
A brokerage account can be used to buy different types of securities, including common stocks, bonds and mutual funds.
Common stocks are fractional ownership of a company. If the company makes a profit and the company’s management decides to share it with stockholders, the company could pay a quarterly dividend to investors. The dividend would go into the brokerage account on the ex-dividend date.
Bonds include things such as Treasury bills, municipal bonds and corporate bonds. Because the U.S. government backs them, short-term Treasury bills are considered the safest securities in the world. Municipalities issue municipal bonds, which can be tax-free.
Depending on how strong a company is, corporate bonds can be safer than stocks of the same company. Many bonds pay a coupon or periodic interest payment that continues until the bond matures. The periodic interest payment also goes into your brokerage account.
Opening a Brokerage Account
To open a brokerage account, fill out an online application or visit a physical location. After you are approved, you must fund the account through an Automated Clearing House (ACH) or check wire transfer.
Unlike 401(k)s, individual retirement accounts (IRAs) and other retirement plans, there is no restriction on how much money you can put in a brokerage account. You should check how strong the brokerage is and whether it has Securities Investment Protection Corp. (SIPC) coverage. SIPC coverage is insurance that protects investors to a certain limit if the stock brokerage firm goes under.
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get started
securely through Plus500’s
website
82% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
Plus500 is an online CFD broker focusing on contracts for difference (CFDs). CFDs are similar to binary options in the U.S. where traders take all-or-nothing speculation on the prices of certain securities like indices, commodities or currencies. While not legal to trade in the U.S., CFDs are legal in many jurisdictions across the globe and Plus500 offers a wide array of tradable markets using these instruments.
Plus500 doesn’t charge commission and only profits off the spread, which is the difference between the buy and sell price of a specific security. But Plus500 is not a broker for beginners — the education materials are sparse and CFDs are risky derivatives capable of sapping out all of an investor’s capital. Only trade these instruments if you understand how they operate and the risks involved with buying them.
Best For
- Traders looking for a smooth mobile experience
- Great mobile app
- Low spreads and commissions
- Unlimited demo account
- Only derivatives are available
- Not open to U.S. residents
get started
securely through Interactive Broker Primary’s
website
Interactive Brokers is a comprehensive trading platform that gives you access to a massive range of securities at affordable prices. You can buy assets from all around the world from the comfort of your home or office with access to over 150 global markets. Options, futures, forex and fund trading are also available, and most traders won’t pay a commission on any purchase or sale.
IBKR is geared primarily toward experienced traders and investors but now with the availability of free trades with IBKR Lite, casual traders can also acclimate to IBKR’s offerings.
Best For
- Access to international markets
- Active traders
- Detailed mobile app that makes trading simple
- Wide range of available account types and tradeable assets
- IB SmartRouting provides significant price improvement vs. industry
- Fractional trading allows investing regardless of share price
- Industry’s lowest margin rates
- Earn more by lending your fuly-paid shares
- Beginner investors might prefer a broker that offers a bit more hand-holding and educational resources
get started
securely through public.com’s
website
Public is the only investing platform that lets you trade stocks, ETFs, crypto, bonds, options and alternative assets—like fine art and collectibles—all in one place. Public also provides access to custom company metrics, live shows about the markets, and insights from a community of millions of investors, creators, and analysts.
Today, Public provides more ways to create a diversified portfolio than nearly any other online broker. Members can engage in sophisticated investing strategies and access a wealth of investing insights—from company-specific analysis to live audio shows and town hall-style Q&As. In addition, Public offers a premium membership tier with unique company KPIs, detailed performance metrics, and institutional-grade research.
Best For
- Stock and ETF investors
- Crypto investors
- Investors looking to diversify with alternative assets or bonds and options
- Commission-free stock and ETF trading
- Fractional share investing
- Advanced data, tools, and insights with Public Premium
- You can’t transfer crypto to another wallet
- No mutual funds or precious metals
- At this time, only offers individual brokerage accounts and not IRAs
get started
securely through Moomoo’s
website
Investing is a long-term journey, and moomoo can help guide investors of all levels every step of the way. Utilized by over 21 million users worldwide – including in the US, Singapore, Australia, Japan, Malaysia and Canada – moomoo is an investment and trading platform that empowers investors with pro-grade, easy-to-use tools, data and insights.
moomoo provides advanced charting tools, technical analytics and Level 2 data for funded accounts, so investors have the resources to make more informed investment decisions. Users can access educational materials and interactive events, as well as share and learn through the inline community.
With a low-cost, competitive fee structure, moomoo can work for all investors.
Best For
- Novices
- Intermediate and advanced traders
- Active traders
- Equity and index options trading
- Commission free trading for US options, stocks and ETFs and 6.8% margin rate
- Wealth of free options tools and features, including customizable options chain, options calculator, unusual options activity, implied volatility analysis, 13 options strategies and 0 days to expiration (0DTE) options by volume
- Free Level 2 data for funded accounts
- Advanced charting tools with 100+ indicators, 37+ drawing tools and 20 candle patterns
- No minimum deposit to open an account
- 24/7 online chat support
- 5.1% APY in Cash Sweep program for new and qualified users
- Does not support crypto
- Does not support retirement accounts or mutual funds
get started
securely through Webull’s
website
Webull is a commission-free trading platform designed with both beginner and advanced investors in mind. Offering an extensive range of assets like stocks, ETFs, and futures, Webull makes it easy for users to manage their investments through a highly intuitive interface. With educational resources, paper trading options, and no minimum account balance required, Webull caters to those looking to start investing without high upfront costs. The platform’s mobile app ensures that users can trade anytime, anywhere, making it a flexible choice for those with busy lifestyles. Webull’s customer service options are limited, and the platform may feel overwhelming to those completely new to investing.
Best For
- Commission-free trading
- Mobile and desktop trading
- Beginners and experienced traders alike
- No commissions on trades
- Extensive range of tradable assets
- Easy-to-use mobile app
- Limited customer service options
- Learning curve for complete beginners
What is a Mutual Fund?
A mutual fund is a managed portfolio of the stocks or bonds of many companies. Because multiple companies comprise a mutual fund portfolio, it may be lower risk than owning stock in a single company.
If things go wrong in one company, other companies in a mutual fund portfolio still could do well, and the mutual fund’s overall value won’t be as negatively affected.
Professional Management
Mutual funds typically have a portfolio fund manager who directs stock market research analysts. The team picks stocks they think will outperform an index, such as the S&P 500, and include it in their portfolio.
Some mutual funds are concentrated in a sector such as energy or technology, while others cover the stock market as a whole. Because professional investment managers make the buy and sell decisions, mutual funds are considered active funds.
Fees
Many mutual funds charge management fees ranging from 0.5% to 2% per year. Many mutual funds also charge redemption or purchase fees when an investor exits and enters the fund.
Historical Performance
Although many mutual funds have outperformed the market for long stretches of time, the statistics on broader active fund performance versus the broader market is sobering.
According to a Standard & Poor’s research report, 92.2% of large-cap active funds, 95.4% of mid-cap active funds and 93.2% of small-cap active funds have lagged behind a simple index fund that only tracks the S&P 500.
The data suggests that although owning a mutual fund is more beneficial long term than holding onto cash, owning a simple low-cost S&P 500 index fund could be a better choice.
Many mutual funds lag the index because of their fees as well as short-term buying and selling, which creates more taxable income than a buy-and-hold strategy.
You Need a Brokerage Account First
You usually need a brokerage account before you can buy a mutual fund unless your employer offers a retirement plan.
Looking for an online broker so you can start investing through a brokerage or with a mutual fund account? Check out our guide on how to start investing, online brokerage rankings or our picks for the best portfolio trackers.
Successful Investing
Understanding the differences between a brokerage account and a mutual fund account is important in investing. A brokerage account allows buying and selling of individual stocks, while a mutual fund offers a professionally managed portfolio. Factors such as fees and performance should be considered when choosing between the two. Making an informed decision is crucial for a successful investment journey.
Frequently Asked Questions
Do you need a brokerage account to buy and sell stocks?
You must have a brokerage account for purchasing or selling stocks.
Answer Link
What is a margin account?
A margin account allows you to buy or sell stocks using a credit line extended to you by the brokerage firm.
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Is mutual fund better than trading?
The choice between mutual funds and trading depends on individual preferences and investment goals. Mutual funds offer diversification and professional management for a hands-off approach and long-term growth. Trading allows for more control and potential for higher returns but is higher risk and requires active monitoring and expertise. Consider risk tolerance, investment knowledge and financial goals when deciding between the two.
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The post Brokerage Account vs. Mutual Fund by Benzinga Contributors appeared first on Benzinga. Visit Benzinga to get more great content like this.