You can open different types of trading accounts with your broker. However, you should be wise when you do that.
It goes without saying then that you should know your choices when it comes to brokerage accounts. Different types of trading accounts offer different benefits and capabilities to your trading.
Here are the types of trading account you can choose from.
Cash Accounts
These are perhaps the simplest types of trading accounts. You also call this type of brokerage account as a type 1 account, where you must deposit the full cost of any purchases by the transactions’ settlement date.
Before the year 2002, many brokerages let you place an order to buy stock even if you haven’t deposited the cash in your account.
But these days, you can only find few brokers that permit that kind of setup. Most brokers nowadays require you to put funds in your cash account before you can start buying assets. The minimum cash account deposit varies per broker.
Margin Accounts
Margin accounts give you some flexibility and trading power even if you do not have much cash on hand.
The margin account lets you borrow certain amounts of money using cash or securities already in the account. That is technical your good faith deposit.
Every brokerage has its screening system to determine if you are eligible to buy and sell on margin.
For the case of the United States, the Federal Reserve has a $2000 required minimum deposit for you to open a margin account.
It presently limits the amount you can borrow on margin 50% of the initial price.
On the flipside, you have to remember that you can’t buy all stocks on margin. Also, when you start buying stocks on margin, you pay a certain interest rate on the margin loans.
The good thing is that most brokerage firms charge very low rates. This low rate expense appeals to many investors to make transactions with the broker.
When you open a margin account, you usually have to sign a hypothecation agreement. This agreement articulates the terms of your account as well as gives the broker lien to your account. So, when your balance falls lower than the minimum maintenance margin, the firm has a lien.
Options Accounts
Now, if you want to trade derivatives, specifically options, the broker will require you to sign a special options agreement.
This agreement lets you acknowledge and understand the risks related with options trading or investing in derivative instruments.
This has become a very common practice among brokerage firms nowadays. That’s because, true enough, options trading is very risky. So much so that you may lose all of your trading capital in a blink of an eye.
Previously, some brokers have been sued by traders because of the huge losses the traders suffered when they traded options. Those traders claimed that they were generally unaware of the risks connected to options trading.
In other words, the agreement aims to protect the broker from lawsuits, and the trader from making hasty options trading decisions.
