The internet is filled to the brim with different companies trying to get you to open a brokerage account with them.
Separating the good from the bad isn’t easy if you’re just starting out and it can be tempting to use the first company that pops up in a Google search.
That’s not guaranteed to be the best course of action though.
Understanding a little bit about opening an investment account and what it means to do so can ultimately mean your money ends up somewhere that suits your needs and there is less chance of fees eating into your portfolio.
What is a brokerage account?
It may seem like a silly question to ask but there are lots of misleading ads out there on the market and people can end up losing money thinking they’re about to open a brokerage account when it’s really something quite different.
When we talk about a brokerage account, the average person is probably thinking of an account with a stockbroker.
Stockbrokers offer customers share dealing accounts that let you buy and sell stocks, often alongside other assets, via a web platform or phone service.
Having access to the financial markets is great in the sense that it provides you with an opportunity to invest and grow your wealth.
Unfortunately lots of companies that do not provide these sorts of investment services also call themselves ‘brokers’ but still invite you to open ‘investment accounts’ with them.
What these companies actually offer is a product known as a ‘CFD’ or ‘contract for difference’.
CFDs have their roots in the UK gambling sector and they are designed for people to take short-term, high-risk bets on price movements in the financial markets.
Most people will realise they’re buying these products but some don’t. So if you are looking to open a brokerage account and find stocks and shares to invest in, make sure you are using a real stockbroker and not a CFD provider.
What to consider before opening an investment account
There are a few factors to consider before you open a brokerage account but sadly there are no cookie cutter answers here.
Everyone has their own goals and financial circumstances and you have to take these into account when considering which company to open a share dealing account with.
Everyone invests to make money but they nearly always have different goals in mind for that cash. One person might be putting money away with no real aim other than seeing it increase in value. Someone else might be investing for their retirement.
Your goals influence which platform you’ll use because they’ll determine things like the assets you want, the fees you're prepared to pay or the tools you need to make investment decisions.
For instance, you may want to make a very small number of transactions every year and leave your portfolio largely untouched. If the brokerage account makes you pay a hefty fee for doing this then the odds are you’ll want to look elsewhere.
Costs, fees and commissions
And that brings us neatly on to one of the big deciding factors for people looking to open an investment account — fees.
The most common fees you’ll have to pay with a brokerage account are:
- Account charges or custodial fees — These have lots of different names but they are basically a fee you have to pay for holding investments in a brokerage account. They are generally a percentage of the value of your portfolio and charged annually. For instance, if the fee was 1% and you had a £100 portfolio, you’d have to pay a £1 fee that year.
- Subscription fees — Instead of account charges, some brokers ask you to pay a monthly fee for opening an account with them. This means you’ll pay the same amount on a monthly or annual basis, as opposed to paying a proportion of the value of your account.
- Trading commissions — These are fees you have to pay for making trades with a stockbroker. You have to pay them when you buy or sell stocks.
- FX fees — When you buy and sell stocks in a different currency to yours, you have to perform a foreign exchange transaction. As an example, if you are based in the UK and buying a US stock, you have to change your pounds for dollars to complete the transaction. Stockbrokers do this for you but they’ll usually charge you for it.
There is almost no uniformity to fees.
Some brokers will charge trading commissions and subscription fees, others may charge no commissions but make you pay an annual account charge.
Obviously you want to keep fees to a minimum but it’s worth keeping other factors in mind too. If you pay low charges but don’t get the service you want or the assets you’re interested in then those cost savings probably aren’t worth it.
What investments are available
This may seem like a really obvious point to make but if a broker doesn’t have the assets you want to invest in, there’s probably no point in opening a share dealing account with them.
It’s easy to think that brokers simply offer everything on the market to their clients but they don’t. Some brokers offer customers access to more markets and asset classes than other brokers do.
For example, if you’re looking for SPACs to invest in and your broker doesn’t offer them, that’s obviously going to be irritating for you.
Checking what stocks and shares to invest in your broker offers is a simple way to stop this from happening.
Services and features
Author Bill Bryson once said that “Americans are polite until they’re not.” To turn this phrase on its head, your broker’s customer service is unimportant until it is.
Because most people don’t tend to spend much time speaking to their broker’s customer service team, it’s easy to forget how annoying it can be when you need them and they aren’t up to scratch.
You might also be someone that wants a helping hand with different features or the investment process. That means you’ll need to be in contact with them more than usual.
Regardless of your preferences, customer service is always important, so figure out if the company you want to open an investment account with has the sort of services you’ll need.
Tools and learning resources
Investors like to have analytics tools and data points to help them make their investment decisions.
Brokers vary massively in what they provide to support this process. Some offer detailed charting and analytics tools. Others don’t provide much at all.
You may also want guidance on how to invest, what to look for when picking stocks and understanding market movements.
All of these things will depend on your own preferences, so if you are absolutely certain you want them then make sure the broker you’re going to open a stocks and shares account with offers them.
Choosing a broker platform that’s right for you
The odds are you aren’t going to find a broker that has exactly the services, fees and tools that you want.
That means you have to balance between those things and figure out which is the best suited to your needs.
This may sound like a long process but it really shouldn’t be and, if you do it right, then you’ll end up with the best brokerage account for you.
Who can open an investment account in the UK and what do you need to open one?
If you live in the UK and you’re 18 or over then you can open a share dealing account with a stockbroker.
You do not have to be a UK citizen to make this happen but you do need a National Insurance number and local address.
Things get a little tougher if you are not a UK resident. Money laundering regulations mean most stockbrokers won’t take overseas clients, so check first if you are looking to open an account from abroad.
Transferring your account from another broker
If you have already opened an account with one broker, you can transfer your portfolio and any cash holdings to another provider.
You may have to speak to both your current broker and prospective one to make it happen, although sometimes the broker you are transferring to will handle the paperwork involved for you.
Transfer times vary and some account types take longer to move over than others.
You can learn more on how to transfer ISAs and other accounts with our dedicated guide.
Types of accounts
When you go to open an investment account you’ll probably be given the opportunity to open one of several different account types.
The most basic one available to you is a regular share dealing account, usually known as a general investment account, or ‘GIA’ for short.
Other account types will do the same but they might come with tax-efficient benefits. The two most popular tax-efficient accounts in the UK are stocks and shares ISAs and SIPPs.
GIA or investment account
What to consider before opening a share dealing/investment account
As we’ve seen already, there are a few factors you’ll want to consider before you open a brokerage account.
- Charges and fees — Are you willing to pay what the broker is going to make you pay?
- Assets on offer — Does the broker have all the stocks you want to invest in?
- Tools and research — Will you get all the data and insights you need to make investment decisions?
One other factor at play here is tax
A normal stock investment account doesn’t come with tax efficiency. That means if you make a lot of money from your investments, you might have to pay some tax on them.
The UK government does give everyone an annual tax allowance for both capital gains — any profit you make from buying and selling stocks — and dividends, payments some companies make to their shareholders.
For the 2023/24 tax year:
- The capital gains allowance is £6,000.
- The dividend allowance is £1,000.
These allowances can change over time so be aware of them. It’s also worth remembering that even if you don’t think any short-term gains you make will go over those amounts, they could in the long-run.
How to open a GIA
Opening an investment account is straightforward and shouldn’t take longer than 10 minutes to get set up.
The process will vary from broker to broker but the core elements remain the same.
You’ll have to provide…
- Personal details, like your name, address, telephone number and email.
- Your National Insurance number.
- Proof of identity, which might include your passport or driving license.
- Financial information, like a card number, so that you can transfer money in and out of your account.
This may seem like a lot of information but, if you have it all to hand, it should be quick. It can take a bit longer for a broker to verify your identity but this can often be done in a couple of minutes too.
The UK has laws in place that mean brokers can offer different tax efficient accounts to customers.
We say ‘tax efficient’ and not ‘tax free’ because, even if some companies say otherwise, there are still some taxes that you’ll be subject to with these accounts.
The two most common tax-efficient accounts in the UK are SIPPs and stocks and shares ISAs.
We’ll look at the latter of those two first.
Stocks and shares ISA account
A stocks and shares ISA is a tax efficient account that you can use to invest in stocks, ETFs and lots of other investment products.
The key benefit of these accounts is that you don’t have to pay tax on any capital gains you realise through your investments. Any dividends you receive from UK-listed shares are also tax exempt.
But there are a couple of caveats to this.
First of all, you can’t invest whatever amount you like — you have an annual ISA allowance that determines how much money you can invest in a stocks and shares ISA in a given year.
The annual allowance for 2023/24 is £20,000, so you can only put up to that amount in an ISA to invest.
The other thing is that you do have to pay tax in a couple of ways.
- You may have to pay stamp duty on UK investments you make.
- Dividends paid on non-UK stocks are usually subject to local taxes.
What to consider before opening an ISA account
Most providers charge customers for holding a stocks and shares ISA. This might be charged as a percentage of your holdings or as a fee.
Fees are one of the key things to think about before you open an ISA.
And as with a GIA, you’ll also want to make sure you’re getting the assets and services you want.
But opening an ISA is also dependent on your personal circumstances.
If you are only investing very small amounts then you may think your annual allowances for capital gains and dividends make the ISA’s tax efficient benefits a bit pointless.
That may be the case but the problem with this approach is you can end up trying to perfectly time the moment when you hit your allowances and then make a switch into an ISA.
This is often not not a good approach to take. You can’t perform an ISA transfer from a GIA.
The only option you have is to sell your GIA holdings and then buy them back in an ISA. But this risks you being out of the market or going over your ISA annual allowance.
How to open an ISA account
Opening a stocks and shares ISA is easy.
If you already have a GIA with a broker then you usually have the option to open an ISA account as well.
For example, on Freetrade you can open an ISA on your in-app account page in a few clicks.
If you don’t have an account and want to open a stocks and shares ISA then the process is very similar to opening a GIA — you’ll just need to provide the various bits of personal and financial information needed to make it happen.
SIPPs are the other major tax efficient investment accounts available to investors in the UK.
SIPP stands for ‘self-invested personal pension’ and, as the name suggests, the aim of these accounts is to help people build up pension savings for their retirement.
If you’re looking at building up a nest egg for retirement and have an idea of how much you need to retire, a SIPP might be for you.
But SIPPs are quite different from both ISAs and GIAs and it’s worth thinking carefully about whether or not you should invest with one.
What to consider before opening a SIPP
SIPPs are supposed to help you provide for yourself when you get older and retire.
This is obviously a hugely important pot of money. It’s bad to be broke in general but it’s even worse if you’re old and have limited income resources.
This means you need to be comfortable investing for yourself when you use a SIPP, as the investments they hold are likely to play a big role in your later life.
The other thing to think about is, because they are designed for retirement, SIPP funds aren’t accessible until you’re 55. And this looks likely to change to 57 in the years ahead.
There are lots of other rules and bits of information to be aware of when opening a SIPP, so read our ‘What’s a SIPP?’ if you want to learn more or speak to a financial advisor.
How to open a SIPP account
Opening a SIPP is similar to opening an ISA or GIA.
If you already have a brokerage account, and your provider offers them, there should be a simple option to open a SIPP.
Alternatively you can open a SIPP from scratch. This will require you to provide the usual personal and financial information needed to open a brokerage account.
Probably the biggest difference between opening a SIPP, as opposed to an ISA or GIA, is the level of documentation involved.
There are a lot of rules governing SIPP operations and thus a lot of terms and conditions you need to be aware of before opening one.
Consolidating all your pensions under SIPP
One of the key benefits of SIPPs is the ability to consolidate all your pension pots into one account.
If you meet eligibility requirements then UK employers are required to enrol you in a pension plan.
This is good in the sense that it gets people investing for their future. The downside is that it can leave you with lots of different pension pots as you move between jobs.
You can transfer all of these into a SIPP, meaning you have all of your pension investments in one place.
Margin trading accounts
As we said at the beginning of this guide, it’s very common to see CFD providers marketing their services as investment accounts.
These are sometimes known as margin trading accounts as they let you trade on margin.
Margin is money you put down as a form of collateral. This allows you to trade with more money than you’d otherwise be able to, and is often known as ‘leverage’.
Most margin trading accounts in the UK only offer CFDs which, when combined with high levels of leverage, are effectively high-risk bets on movements in the financial markets.
Freetrade does not offer CFD margin trading accounts as we believe they do not provide value to investors or encourage the sort of investing habits that usually provide positive financial outcomes over the long term.
Brokerage account vs Robo-adviser
Robo-advisers are firms that offer you an automated investment solution. They’ll take pieces of information about you and use that to make investment decisions for you.
Therein lies the main difference between brokerage accounts and robo-advisors.
Most brokerage accounts offer a DIY service where you choose what to invest in. Others also provide accounts that are advised, with a financial professional managing your funds for you.
Robo-advisors are generally free of a human touch and simply involve you providing some information and then having investments assigned to you by an automated system.
I'm a first-time investor, what investment account is best?
Regardless of your level of investment knowledge, the most important thing to think about when opening an investment account are your goals.
For example, if you want to keep your tax bill low and invest for the long-run, a stocks and shares ISA might be a good option for you.
If you don’t know where to get started or how to think about your goals, then our ‘How to invest in stocks for beginners’ guide is an easy way to get started.
What next? Deposit funds and start investing
That leads us to our final point.
Figuring out what brokerage account to open is one step on the road to investing.
Doing those things is what will ultimately determine how successful you are at making money for your future.
We think investing should be open to everyone. It shouldn’t be complicated, and it shouldn’t cost the earth. Our stock trading app makes it simple for both beginners and experienced investors. And costs are low. You can buy and sell shares commission-free and take advantage of fractional shares (buy just a part of a share).