An investment account is how investors are able to access the financial markets and invest in stocks, bonds, exchange-traded funds, mutual funds, investment trusts, and other types of securities. These are also known as brokerage accounts or share dealing accounts and come in all sorts of shapes and sizes.
Opening an investment account is one of the first steps along an investing journey. So, let’s explore exactly what they are, how they work, and what factors investors need to consider when picking the proper account for them.
What is an investment account?
An investment account serves as a vehicle to deposit cash that can then be used to purchase various financial securities. There are various types of brokerage accounts that cater to different needs.
The vast majority of standard accounts provide access to the leading stock exchanges across the United Kingdom, the United States, and Europe. Such flexibility opens the door to buying and selling stocks, bonds, investment funds, unit trusts, and ETFs. However, for more specialised financial instruments like options, futures, and forward contracts, more specialised accounts are required, which are often reserved for experienced investors.
There are three main categories which a standard brokerage account can fall into:
Full-Service Brokerage Account
This type of investment account provides investors with a complete suite of additional services. Beyond buying and selling financial assets, the account holder can discuss strategies with experts, receive investment advice, have trades executed on their behalf, and have all the accounting and tax calculations automatically prepared.
Additionally, full-service brokers typically offer additional services and products relating to portfolio management, financial planning, estate planning, retirement planning, and tax advice.
In other words, this type of account is designed to provide investors with everything they need to manage all their finances. However, these services aren’t free. And full-service brokerage accounts can be relatively expensive compared to other options.
While each broker has a different pricing structure, the average cost for a full-service investment account before commission fees are typically around 1% to 2% of assets under management per year.
Discount / DIY Brokerage Account
Not every investor is interested in receiving advice or ancillary finance services. And that’s where the discount brokerage account steps in. Sometimes referred to as a do-it-yourself (DIY) account, these enable investors to access the global financial markets without any handholding.
The investor has free reign to invest in whatever assets they want and execute whichever strategy they feel is best for them. It is up to the investor to perform the necessary research behind each investment decision, and they will often be required to prepare their tax documents. However, it’s worth noting that the broker will still provide all legally required reports at the end of the year or when requested at no additional cost.
Some discount brokers also offer an investment research service as an optional add-on premium service. While this type of investment account requires much more work from individual investors, the costs are significantly lower than full-service brokerage accounts.
With rising competition in the industry, many discount accounts do not have an annual fee and only charge investors using trading commissions.
Robo-Advisor Account
A relatively new type of investment account is the Robo-Advisor. This is an automated investment account where investors define what level of risk they are willing to take and their investing time horizon. Based on this information, a trading algorithm will invest its capital into a diversified portfolio of stocks, bonds, and funds deemed most suitable.
This service effectively allows individuals to put their investments on autopilot in exchange for an annual fee. However, investors can still override the Robo-advisor’s decisions if they want to.
Margin Account
A margin accounts enable investors to borrow money from their broker at a relatively low-interest rate to execute more complex trading strategies such as shorting stocks.
This enables investors to use leverage to amplify their potential gains in the stock market. However, doing so also opens the door to additional risks. And it’s possible to lose more money than was initially invested, a threat that doesn’t apply to a regular cash account.
Investing on margin is considered a high-risk strategy suitable only for professional traders. Therefore, most margin account brokers usually restrict which customers can open this type of account.
What are the fees for an investment account?
As already mentioned, opening a brokerage account isn’t always free. And there are several fees that investors need to consider before opening one. The costs can vary between account providers. But the types of fees remain largely consistent, and it’s essential to understand what they are:
- Trading / Commission fee – This is a fee when buying or selling a stock or fund. Depending on the brokerage account, it can either be a flat rate or a percentage rate. On average most UK brokers will charge a commission of around £10 per trade. However, some platforms provide commission-free trading where there is no fee charged when buying or selling stocks.
- Account Maintenance fee – Some investment accounts have a monthly, quarterly or annually recurring fee. These are to help the broker cover the cost of providing additional services such as statement preparation and online access. While there are exceptions, investment accounts that charge a recurring fee typically charge lower commission fees.
When selecting an investment account, investors should consider the total costs involved and aim to find the best price-to-value proposition for their specific needs.
Do I have to pay taxes on my investments?
Profits made through the appreciation of share prices are subject to capital gains tax. Similarly, any income received through dividends is subject to income tax. It’s also worth noting that when buying shares in a UK business listed on the main stock market of the London Stock Exchange, investors have to pay Stamp Duty tax which is equal to 0.5% of the transaction value.
Here in the United Kingdom, there is a £6,000 tax-fee allowance for capital gains and a £1,000 allowance for dividends received each year. If an investor is generating more than these thresholds, the earnings must be reported to HMRC to be taxed.
Taxes are an often forgotten expense when it comes to investing. And it can have a significant adverse impact on the wealth-building process. Fortunately, there are some special types of investment accounts that provide some tax benefits for British investors.
Stocks and Shares ISA
The Stocks and Shares ISA is a tax-immune investment account provided by some registered brokers. Investors can deposit up to £20,000 per tax year for investments in stocks, bonds, and funds both nationally and internationally. This £20,000 limit is shared across all other ISA accounts and is referred to as the ISA allowance.
Any capital gains or dividends received are not subject to tax. Furthermore, investment positions and gains do not have to be reported to HMRC, eliminating a lot of hassle when filing annual tax accounts. However, investors must still pay Stamp Duty when buying UK shares.
Self-Invested Personal Pension (SIPP)
The Self-Invested Personal Pension is a tax-deferred investment account some registered brokers provide. Investors can contribute as much as their annual salary into the SIPP account and even receive tax relief on all contributions of up to 45%, depending on their income tax bracket.
The basic tax rate that UK investors are eligible for is 20%. Therefore an investor who deposits £1,000 will receive an additional £200 from the government if they are on the basic tax rate.
Like the Stocks and Shares ISA, any capital gains and dividends received inside a SIPP are not taxable. However, money can only be withdrawn from a SIPP after reaching the age of 55, which is increasing to 57 in 2028.
Furthermore, when funds are withdrawn from a SIPP, pension taxes apply. This means 25% of a portfolio can be withdrawn tax-free, but the remaining 75% is subject to income tax. In other words, the SIPP allows British investors to defer their tax payments to a later date.
Tax treatment is dependent on individual circumstances that may change in the future, and this article does not constitute any form of tax advice. Before committing to any investment decision, an investor must consider their individual financial circumstances and reach out to an independent financial advisor if necessary.
List of investment account providers
Below is a summarised list of leading brokerage account providers and the fees associated with their regular trading accounts.
Barclays
- Account Maintenance fee from £4 a month
- Commission fee from £3 per transaction
Halifax
- Account Maintenance fee from £36 per year
- Commission fee of £9.50 for UK Shares. Free for international stocks, but a 1.25% foreign currency fee is charged.
Hargreaves Lansdown
- No Account Maintenance fee for stock portfolios. Portfolios with Funds are subject to a management fee starting from 0.45%.
- Commission fee on stocks starts from £11.95 but can fall to as low as £5.95 for frequent traders. There is no commission fee on funds.
IG
- Account Maintenance fee of £24 every three months. However, this fee drops to £0 if at least three trades have been executed during the period.
- Commission fee from £8 per transaction but can fall to £3 for UK shares and becomes free for US shares if more than three transactions are executed in a single month.
Interactive Investors
- Account Maintenance fee from £9.99 a month
- Commission fee from £5.99 per transaction.
How to open an investment account
When opening a brokerage account, there are a few steps investors should follow:
- Determine what type of investment account is needed.
- Research the available brokers to find the ones that meet desired requirements.
- Compare the costs of each broker to find the most cost-effective option.
- Pick the most suitable brokerage account and start the account application process.
- Fund the account with capital and begin the investing journey.
Investment account vs savings account
Savings accounts are a common way for individuals to store wealth and receive a small income stream through interest payments. Moreover, up to £85,000 of cash deposits per individual in a bank or building society is insured by the FSCS. Therefore even if the financial institution suddenly goes bankrupt, the money of most customers is protected. That’s why savings accounts are considered by many to be virtually risk-free.
Investment accounts do not benefit from this same level of protection. However, the ability to invest in financial securities like stocks and bonds opens the door to significantly higher returns at the cost of additional risk. The stock market can be subject to intense periods of volatility. And it’s possible that an investment destroys wealth rather than creates it.
The bottom line
Investing in the right financial products with a brokerage account can yield fantastic returns for investors. But it’s critical to remember that nothing is risk-free, and there are costs involved. It’s critical to perform detailed research and to fully understand an investment before executing it.
Discover market-beating stock ideas today. Join our Premium investing service to get instant access to analyst opinions, in-depth research, our Moonshot Opportunities, and more. Learn More
This article contains general educational information only. It does not take into account the personal financial situation of the reader. Tax treatment is dependent on individual circumstances that may change in the future, and this article does not constitute any form of tax advice. Before committing to any investment decision, an investor must consider their individual financial circumstances and reach out to an independent financial advisor if necessary.
The Money Cog is not affiliated with any of the brokers or service providers mentioned in this article.
