A trading account is an account holding investments such as cash, stocks, and various holdings. If you’re thinking about opening a trading account, now is a great time to start. However, you need to understand what type of trading account you want, based on your needs and preferences. You will also need to take some time to research different brokers and decide whether you would like to use an offline or online broker to handle your account.

Here are a few takeaways:

  • Trading accounts may contain holdings like cash and securities.
  • Tax-deferred retirement accounts are trading accounts, too.
  • To open a trading account, you need to provide certain personal information and documentation, including multiple forms of ID, such as your Social Security Number.
  • You must open a brokerage account with an investment firm.
  • You have at least three brokerage options, but full-service brokers may be the best option in many cases.
  • Some steps for opening traditional and online trading accounts may vary, but the online process may be simpler overall.

What Is a Trading Account?

A trading account, also called a brokerage account, is any investment account that contains securities, cash, or other holdings. More complex investments include options, foreign exchanges (forex), and futures. Trading accounts are distinguished from other investment accounts based on the level of activity, the purpose of that activity, and the level of risk involved.

Often, a trading account refers to a day trader’s primary account. Day traders tend to buy and sell assets frequently, especially within the same trading session. According to the Financial Industry Regulatory Authority (FINRA), a day trade is the purchase and sale of a security within the same trading day in a margin account. A pattern day trader must make at least four trades over a five-day week, and the day-trading activity should account for more than 6% of their total activity during that week.

A standard brokerage account is often referred to as a taxable account since there are no tax advantages when you invest through one. Most of the time, you will need to pay taxes on your earnings. On the other hand, you can invest as much as you’d like in a standard brokerage account and pull your money out at any time and for any reason.

Retirement accounts, such as a Roth IRA or traditional IRA, offer you a tax advantage. You will only be taxed once you take money out of the account. However, these types of accounts place restrictions on how and when you can withdraw money and how much money you can deposit each year.

What You Need to Open a Trading Account

You need to be at least 18 years old before opening a brokerage account. Investors under 18 may be able to get assistance from their parents or guardians, who can open custodial accounts.

Next, you will also need to provide the following information and documentation:

  • Your name
  • Your address
  • Any work information
  • Your Social Security Number
  • A W-9 form
  • One or two other forms of identification

You may also need to provide more information or other documents if the broker you choose requires them.

Your Brokerage Options

Your brokerage options before opening a trading account include money managers, full-service brokers, and online brokerage services.

Money managers allow traders to be the most hands-off because managers will handle all their client’s trades, set goals for their client’s portfolios, and give their clients updates on the portfolio’s performance. However, money managers are the most expensive option. They charge expensive fees and require minimum initial investments of at least $100,000.

Full-service brokers may charge higher fees than online brokerages, but you can open an account with only $1,000. These brokers also offer their clients the most amount of services, which include:

  • Determining their client’s financial goals by taking that client’s age, retirement plans, marital status, personality, and risk tolerance into account.
  • Working with their clients to make investment strategies.
  • Making direct trades for clients, when requested.
  • Giving advice on financial decisions like estate planning.

Online brokerages may have human advisors and robo-advisors. The latter are based on complex computer algorithms. Robo-advisors can manage your investment by taking your goals and investing timeline into account.

Depending on your level of expertise, one of the offline options, particularly a full-service broker, might be best. Online trading platforms, on the other hand, are meant to make trading easier and more accessible to traders, regardless of their level of experience with stock markets.

How to Open a Traditional Trading Account

If you would like to open a traditional trading account, these are the steps you should take:

  1. Ensure that you have risk capital. Always take care of your living expenses first. Also, pay down your debt and try to put at least six months’ wages in savings. If you have a retirement plan, such as a 401(k), always contribute to it and try to maximize matching contributions from your employer. If you have any money left over, that can be your risk capital.
  2. Determine how you want to invest your risk capital. For example, if you would like to make day trades, that will help you choose a broker, the type of account you will need to open, and the type of services you will need.
  3. Research brokers. Certain brokers and brokerage firms offer certain services. They will also require minimum balance requirements and have different fee structures.
  4. Choose a broker. Based on the way you would like to invest and that broker’s reputation, choose the best broker.
  5. Open a trading account. Provide all required information and make your first deposit.

How to Choose an Online Trading Platform

Here are some tips for choosing an online trading platform:

  1. Choose among the most reputable and well-regarded platforms. At the very least, choose among the platforms that are registered with the Securities and Exchange Commission (SEC).
  2. If you want to engage in day trading, find an online platform that is more responsive. Also, only choose online brokers with advance research and analytical tools if you want to engage in day trading. These brokers are more expensive, but the number of services they provide justifies the price.
  3. If you would like to make long-term investments, find a platform with higher trading fees and basic services. If you are passively trading, the service you choose should charge you lower monthly fees.
  4. Choose the type of account you want. An online brokerage firm may also ask if you want to open a margin account of a cash account. A margin account allows you to borrow money from the broker to make trades, but this is a risky option and you will have to pay interest.

The application process for online brokerage accounts typically takes 15 minutes to complete. When you register with an online broker, you will have to provide your email address and create a username. However, it may take a few days to a week to start trading after you make your first deposit.

Cash Account vs. Margin Account

Even though some brokerage firms allow you to open an account with no initial deposit, you will need to have money in your account to start investing. You thus have two options: Either open a cash account or open a margin account.

Cash accounts are those in which you are required to put in money to make any trades. Cash accounts should have enough total money to allow you to make certain trades.

A margin account is a brokerage account that will allow you to borrow cash from your broker so you can purchase financial products such as stocks. You will have to add your own cash to the account as needed. That cash and the securities you purchase will serve as collateral. Day traders typically choose to open margin accounts.

With a margin account, you will have the potential to earn a better return should the securities appreciate. However, you will have to pay interest rates and face a potentially greater loss if your securities depreciate.

A cash account is preferable, at least for new investors. With a cash account, you will have to use your own money and keep the balance at or above the minimum, but you will not have to pay interest.

Maintenance Requirements

Depending on your broker, you will need a certain amount to start investing, but you may also need to maintain a minimum amount in your trading account. Maintenance requirements for pattern day traders include maintaining a base equity level of $25,000 or 25% of securities values, whichever is higher. Day traders must also maintain purchasing power in their trading accounts that does not exceed four times any excess over that minimum requirement.

Get Started With a Trading Account

Now that you understand the basics of opening a trading account, you might be anxious to start trading. Just remember to do your research on brokers and brokerage firms and decide if an online or offline brokerage is right for you. Also, remember to get your documents in order and make sure you have enough risk capital to start. If you need more information about trade accounts and trading in general, look to Raging Bull’s experts, who have a wealth of knowledge and experience to steer you in the right direction.

Jeff Williams

Jeff Williams is a full-time day trader with over 15 years experience. Thousands of entry-level and experienced traders alike – day-traders and swing-trade small cap stock traders – credit Jeff with guiding them to turning small accounts into big accounts.

Jeff’s "Small Account Challenge" shows people how to transform accounts from a few thousand dollars into $25k, $50k or even $100k.

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