Trading Account Types

When opening a stock trading account with your online discount broker, there different trading account types you will need to consider.

The two most common accounts that most online discount

brokers offer are:

* Cash Accounts

* Margin Accounts

While individual brokerages may provide other account types, they normally are a variation of the above.

So lets get started discussing these accounts - shall we?

Cash Accounts

Cash accounts are the simplest and easiest type of brokerage accounts to open.

This is most likely the first type of account you will open.

Most online and discount brokers may allow you to open a cash account with as little as $100.

If you are not ready to trade and wish to fund your account to a certain level, some of the brokers will place this money in an interest-bearing account until you are ready to trade. When you place your first buy order, the broker transfers the money to the brokerage account to cover the trade.

Whenever you sell the stock, the broker will deposit the proceeds in your account (unless you instruct them otherwise). This means you will have cash available for the next purchase.

You also may be subject to a "settlement date" of three days form the time you sell a stock if you wish to withdraw you cash.

Margin Accounts

Margin accounts allow you to borrow money to purchase stocks. A margin account allows you to borrow up to 50% of the value of the stock from your broker when you make a purchase.

For example, if you want to buy $5,000 of stock, and you only have cash of $2,500 in your stock account, you can borrow the extra $2,500 from your broker.

This allows you to multiply your profits dramatically.

How? If the price of that stock doubles, your total account value actually increase four fold.

In other words - you double your cash from $2,500 to $5,000 and you double what the broker gave you by the same amount.

You now have $10,000 to trade with!

There is the obvious risk that if the value of the stock falls instead of going up,your broker issues what is called a “margin call.”

This simply means they want their money back or want you to add additional funds.

Most online brokers will accept a certain minimum amount margin trading account types.

For example - OptionsXpress requires you to have funded your brokerage account with $2,000 before they can convert it into a margin account.

Scottrade requires $2,500.

Be careful of pattern-day trading

Be careful of what most discount and online brokers call pattern day trading. This may occur when you transact four or more stock day-trades (buying then selling, or selling short then buying, the same stock on the same day) within a five-day period.

It may also occur if you attempt to recycle funds within the same day.

Here is an example that might help clarify this.

Lets say you buy stock XYZ for a premium of $400. You then proceed to purchase another stock for $400 when no other capital is available and prior to funds being cleared. This is considered pattern-day trading, or what we know as day trading.

FINRA regulations require that if you are a pattern day-trader, you must maintain at least $25,000 in account value in order to continue day-trading practices.

If your online stock broker designates or flags your account as having pattern-trading tendencies, a "call" will be issued which must be met within 5 business days.

This "call" means that you have to fund your account with $25,000 - same amount required for day traders.

If you cannot meet the requirements, your broker may restrict your account to cash for up to 90 days or until it meets the call minimum requirements.





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