To understand what an investment account is, it helps to understand how bank accounts work, and then illustrate the ways in investment accounts are different, and the ways in which they are similar.
You know what your bank account is: you put your money into a bank, and the bank will give that money back to you when you need it, either in cash, or electronically in the form of online or debit card payments.
Why does the bank offer you this service? Because they make money by taking your deposits and lending them out to people and earning an interest rate on it. Sure, they owe you that money back any time you ask for it, but as a practical matter, they know that most people will not ask for all of their money back on any given day.
In fact, a bank can only exist because they know that, on any given day, only a tiny fraction of the amount they hold in deposits needs to be made available to their customers in cash or electronic payment form. So, they can – with some degree of confidence – know how much they can lend out and make money on.
Banks so value your willingness to leave the money in there for longer that they will pay you a portion of their returns if you guarantee that you will leave the money in the bank for longer. In the implicitly longer-term deposit that is a savings account, they pay a lower interest rate. But for an explicitly committed deposit like a fixed deposit, they will pay a higher interest rate, and sometimes significantly higher.
Banks guarantee that the nominal amount in your money will never go down based on their lending. They are taking on the full risk, and hence they get to keep most of the returns from that lending activity.
An investment account operates on the same general principle – you give your money and expect to have it back – but with some key differences: the money is being invested in things that are often risker – shares in publicly traded companies, for example – but have higher returns. In exchange for the higher returns, you are taking on more risk, and the investment company is passing on both the investment returns and risk to you. As a result, the fees charged by an investment company are generally significantly lower than the amount of money a bank makes on deposits.
The differences are significant so they bear repeating: an investment account – typically opened with a brokerage firm – does not guarantee that you will get the nominal amount you invested back. You are taking the risk that you will lose some, and possibly even all, of the money you put into that account.
An investment account with Elphinstone is, in reality, a composite of two things. You would simultaneously become the client of:
- Elphinstone, Inc., a Registered Investment Advisor, regulated by the United States Securities and Exchange Commission (SEC), which would advise you on how to invest your money, through an algorithm that is built into our app, Elphinstone US.
- Alpaca Securities (or Interactive Brokers for some clients), a securities broker-dealer registered with the Financial Institutions Regulatory Authority (FINRA) of the United States, which is the entity that has custody of your assets, and allows you the ability to buy and sell stocks, ETFs, and other securities in your account.
As we’ve mentioned, there is no guarantee that you will get your money back, but you get more flexibility with respect to the types of things you can invest in through your investment account with Elphinstone (learn more), and your account would be insured by the Securities Investor Protection Corporation (SIPC) for up to $500,000 in the event that we or our brokerage partner went out of business (learn more).