A brokerage account is a tool you can use to invest in the stock market. They are also called taxable investment accounts to differentiate them CPA  from tax-advantaged retirement accounts like 401(k)s. You can open a brokerage account with online brokers or robo-advisors.

How Does a Brokerage Account Work?

You deposit cash in a brokerage account and use the funds to purchase investment assets like stocks, bonds, mutual funds and exchange-traded funds (ETFs). Brokerage accounts are used for day trading to earn short-term profits, as well as investing for long-term goals. Most brokerage accounts also provide a way to earn a decent yield on uninvested cash.

A broker maintains your brokerage account and acts as the custodian for the securities you own in your account. It acts as an the intermediary between you and the stock market, buying and selling assets on your instructions.

You can open a brokerage account at a wide range of firms, from full-service brokers with a complete menu of financial services, to automated robo-advisors and online brokers. Fees and requirements vary. There may be a minimum balance required to open an account, some firms may charge management fees and there may be trading commissions to buy or sell certain assets.

Margin Account vs. Cash Account: What’s the Difference?

There are two main types of brokerage accounts: cash accounts and margin accounts. The difference between them is how you purchase your investments.

What Is a Brokerage Cash Account?

When you have a cash account at a brokerage, you buy securities with the money deposited in the account. “If you have $100, you can only buy $100 worth of stock,” says Matthew Boersen, a certified financial planner in Jenison, Michigan. If you don’t have more money in your account, you can’t purchase additional securities.

What Is a Brokerage Margin Account?

With a margin account, you can borrow money to buy investments, and the investments themselves are collateral for the loan. “If you have $100, you could potentially buy more than $100 worth of stock,” Boersen says. “The custodian will give you a loan so you can buy additional stock. You have to pay interest on the loan, but it’s a loan internally, inside your account.”

A margin account allows you to execute more complex trading strategies, such as short selling, but there are risks to using debt, instead of cash, to invest. For instance, if the value of your investments falls, your brokerage firm may ask you to pay back your margin debt immediately—this is known as a margin call. The firm also has the right to sell any of the investments in your portfolio, without advance notice, to cover an account deficit.