Brokerage firm

Also called Broker-dealer

A company that buys and sells stocks, bonds, funds and other securities for customers and holds them in investment accounts.

What it means

A brokerage firm lets you open accounts, such as a taxable brokerage account or an IRA, to buy and hold investments. Firms range from full-service brokers that offer personal advice to discount and online brokers where customers place their own trades. Many earn money through advisory fees, fund fees, interest on customer cash and payments tied to order handling.

Brokerages are regulated by the SEC and an industry self-regulator, and most are members of SIPC. SIPC protection covers up to $500,000 per customer, including a $250,000 limit for cash, if the firm fails and customer assets are missing. It does not protect against investment losses. Uninvested cash is sometimes swept into partner banks, where FDIC rules apply instead.

Example

Suppose an investor opens an IRA at an online broker, deposits $5,000 and buys a low-cost index fund. If the fund falls 10%, the account drops to $4,500, and SIPC does not cover that loss because it is a market decline, not a firm failure.

How it’s used

Investing for retirement in an IRA
Buying stocks, ETFs, bonds or mutual funds
Holding long-term savings beyond a bank account

Strengths and weaknesses

Strengths

Access to a wide range of investments
Many online brokers charge no commission on stock and ETF trades
Assets held in the customer’s name, with SIPC protection if the firm fails

Weaknesses

Investments can lose value and are not deposit-insured
Fees can hide in fund expenses, advisory charges or low cash sweep rates
Easy trading can encourage frequent, costly decisions

Good to know

Check what rate the firm pays on uninvested cash and where that cash is held.

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.