Stock Trading for Beginners (1) – Types of Brokerage Accounts

Guides and Tips for Beginners on How to Trade Stocks Online

Stock Trading for Beginners - Types of Brokerage Accounts

Beginners’ Guide to Stock Trading - Understand the Types of Brokerage Accounts

 

The first step for beginners to start stock trading is to open a brokerage account. A brokerage account is an account at a brokerage firm for the purpose of investing. A brokerage firm is a financial institution that facilitates the buying and selling of financial securities between a buyer and a seller.

 

Types of Brokerage Firms

There are two types of brokerage firms: traditional brokerage and discount brokerage.

A traditional brokerage firm (also known as a full service brokerage firm) can offer investors one-on-one service through a personal stock broker. The broker is entrusted with the responsibility of providing recommendations, buying and selling stocks. 

A discount brokerage firm offers investors an automated, computerized trading system rather than an actual broker to assist with the trade. The charge on a trade is significantly lower because there is no broker involved. Many brokerage firms offer both traditional and discount services.

Below are guidelines for beginners on how to select a brokerage firm.

  • Service – Pick the one that has a strong customer support group and offers both traditional and online discount services.
  • Commission – Commission cost should not be a key factor. In some cases, the higher price means better services.
  • Research Tool – Quote, watch list, alert and chart are basic tools for stock trading and studying.
  • Trading Tool – Some online brokerage firms offer advanced trading software. Fidelity Investment’s ‘Active Trader Pro’ is an example. A feature such as multiple triggers for a buy or sell is extremely useful, because one can easily set an order to buy ABC stock at a limit of $40 when XYZ index moves up more than 2%.
  • Trade Execution Speed –  In fast-moving markets, the cost of a transaction depends on whether or not the system can fill orders quickly and at the best available price. Make sure to select the brokerage firm that has the capability of adapting new technologies.
  • Interest Rate – Some brokerage firms will offer interest on cash in the account, while others will not.
  • Minimum Balance and Maintenance Fees – Be careful about potential fees to avoid surprises. 
  • Tax Software Compatibility – The ability to import 1099 statements and cost basis data is a function nice to have.

 

Types of Brokerage Accounts

There are three main types of brokerage accounts: cash account, discretionary account, and margin account.

A cash account is the basic brokerage account that an investor uses cash balance to buy stocks. 

A discretionary account is an account in which a broker is authorized to make trades for the investor at will. Do not sign up this type of account unless the broker has a well known reputation.

A margin account is an account that allows the investor to borrow money from the brokerage firm to buy stocks. The equity in the account must not fall below the maintenance requirement. Lets assume an investor purchases $1000 worth of stocks by borrowing $400, and the maintenance requirement is 50%. When the value of the stocks drops to $700, the equity in the account becomes $300 ($700 – $400 = $300), and maintenance requirement becomes $350 ($700 x 50% = $350). In this case, the investor has to send at least $50 ($350 – $300 = $50) to the firm, otherwise the firm will sell the stocks to increase the equity of the account.

Margin accounts may create debts when markets drop, therefore, we recommend cash accounts for beginners to trade stock.

 

 

 

 

 

 

Posted by on May 12, 2012 in Stock Market Basics | 0 comments

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