What is the difference between a brokerage account and a mutual fund account

What is the difference between a brokerage account and a mutual fund? The main difference between a brokerage account and a mutual fund is structure, ongoing fees, opening costs, and minimums. Brokerage accounts are accounts that hold investments they are not investments.

Mutual funds are pooled investment securities, and they are not accounts. Mutual funds can be stored in brokerage accounts. New investors need to learn the main differences and similarities between mutual funds and brokerage accounts before investing. Each approach to investing offers its advantages as well as disadvantages. The following will help to understand better and choose the best method that is right.

There are a couple of ways the investor may open brokerage accounts. Furthermore, a brokerage account can have two types of ownership: individual or jointly.

Is a brokerage account an investment account? Yes, a brokerage account is an investment taxable account that allows you to buy and sell various assets, such as stocks, bonds, mutual funds, currency pairs, cryptocurrencies, indices, and ETFs. Investors can transfer money from a private bank account to a brokerage account whenever they want. Mutual funds are collective investment securities. They group the assets from various investors to build a single portfolio managed by a professional.

Additionally, a mutual fund can be used for investing in cash, bonds, stocks, or a mix of these types of assets. One way to remember a mutual fund is similar to a bucket holding anywhere from a few holdings to hundreds. Although different types of investments, mutual funds, and brokerage accounts still have several similarities. While they may be subtle, investors must have a complete understanding of them. Applying online usually takes 10 to 20 minutes. Processing the application and getting your account funded usually takes one to three days.

Once your account is active, buying and selling mutual funds is simple. While each site is a little different, they all operate in essentially the same way.

Indicate the ticker symbol of the fund you want to buy and the amount you want to invest—unlike stocks, mutual funds require you invest a set dollar amount rather than purchasing a certain number of shares.

In addition, you may be asked how you want dividend distributions handled if you didn't set this up when applying : either by using them to buy additional shares of the fund, or having them deposited into your investment account as cash. Once you fill out the trade request, your trade remains pending until the fund's daily share value is calculated at the end of the trading day.

Most mutual funds report their net asset value NAV by 6 p. Once the NAV is reported, you know how many shares you have actually purchased. It takes between one and three business days for your trade to "settle," meaning the official financial transaction is not completed right away. The SEC requires it to be no longer than two business days.

Investment firms and brokerage sites post information about the time frame for mutual fund trades. Once you've mastered the mechanics, the real work begins: deciding what kind of mutual fund best suits your investment needs.

First, consider your risk tolerance. Typically, investments that offer the potential for big gains, such as high-yield mutual funds and most stock investments, also come with a greater amount of risk than investments that offer more modest returns.

If you have a low-risk tolerance, avoid mutual funds that invest in highly volatile securities or employ aggressive investment strategies that seek to beat the market. Next, determine what you are trying to accomplish with this investment. If you want something that generates consistent income each year, choose a mutual fund that pays dividends or a bond fund.

If you want to minimize the short-term tax impact of your investment, choose a fund that makes very few annual distributions, does not pay dividends and focuses on long-term growth. If your chief goal is to create wealth quickly, even if it means increased risk, look at high-yield bond or equity funds. If you choose an actively managed fund , as opposed to a passively managed indexed fund, research the track record of your chosen fund's manager. The success of actively managed funds depends on the experience, skill, and instinct of the fund's manager, so the historical returns generated by other funds under their care are a good indication of their prowess.

In reviewing mutual funds, you should be aware of the types of fees and expenses you are likely to incur. In some cases, the costs associated with a given mutual fund may render its returns considerably less impressive. The one cost carried by all mutual funds is called an expense ratio.

This is simply a percentage of the value of your investment, generally between 0. Actively managed funds typically have higher expense ratios than their passively managed counterparts because their increased trading activity generates more paperwork and requires more man-hours.

If the fund you choose has a particularly high expense ratio, make sure there is not a cheaper fund offered elsewhere with the same objectives and a similar portfolio. For indexed funds, especially, seek out the cheapest: Since they are designed to simply invest in all the securities of a given index, there is little difference between funds that are tracking the same index.

In addition to the annual expense charge, many mutual funds impose sales charges, known as loads. Set by the fund management, a load is essentially a fee paid to the broker, financial planner or investment advisor who sold you the fund this is distinct from the sales commission or transaction fee the brokerage itself might charge you—confusing, we know.

Load fees can be charged at the time of investment a front-end load , or at redemption a back-end load or deferred sales charge. Some funds are advertised as no-load funds. However, be aware they can still charge a number of other fees that make them just as expensive. Carefully read the terms of your chosen fund to see if it charges any redemption, purchase or exchange fees to shareholders who wish to alter their initial investment by selling shares, buying additional shares or moving to another fund offered by the same firm.

Many funds do, particularly if you make a change with 60 or 90 days of your initial purchase. Other common expenses include 12b-1 fees, to defray the cost of marketing, advertising, and distributing the fund and its literature. Many funds offer three classes of shares , such as A, B, and C, that carry different types of expenses to cater to different investment strategies. A standard brokerage account — sometimes called a taxable brokerage account or a non-retirement account — provides access to a broad range of investments, including stocks, mutual funds, bonds, exchange-traded funds and more.

Any interest or dividends you earn on investments, as well as any gains on investments that you sell, are subject to taxes in the year that the money is received. With a non-retirement account you have a choice in how it is owned:. Individual taxable brokerage account: Opened by an individual who retains ownership of the account and will be solely responsible for the taxes generated in the account.

Joint taxable brokerage account: An account shared by two or more people — typically spouses, but it can be opened with anyone, even a non-relative.

When you open a brokerage account, the firm will likely ask you whether you want a cash account or a margin account. A cash account is appropriate for the majority of investors. It allows you to buy investments with money you deposit into the account. A margin account is for investors who want to borrow money from the broker to buy investments.

Margin trading is a riskier type of investing that is best suited for advanced traders. Eligibility: You must be a legal adult at least 18 years old and have a Social Security number or a tax ID number among other forms of identification to open a brokerage account.

Good to know: There are no limits on how much money you can contribute to a taxable brokerage account, and money can be withdrawn at any time, although you may owe taxes if the investments you sell to cash out have increased in value. See the online stock brokerage firms that earned high marks in our review. Limited time offer. Terms apply.

A retirement account, such as an IRA, or individual retirement account, is a standard brokerage account with access to the same range of investments. If the company you work for offers a k plan and matches any portion of the money you save in that account, contribute to the k before funding an IRA.

Depending on the type of IRA you choose, you get either an upfront tax break in the year you make contributions to the account with a traditional IRA or a back-end tax break that makes your withdrawals in retirement tax-free via a Roth IRA.

Joint IRAs are not allowed. Eligibility: You must have earned income or a spouse with qualified earned income to be eligible to contribute to an IRA. Read more about IRA eligibility rules here. These providers offer ample tools and guidance for savers looking for a place to open an IRA. See our top-rated providers. One of the most popular types of accounts used to pay for education expenses is the savings plan.