Brokerage Accounts - Cash,Margin or Discretionary
Filed Under Brokerage Accounts, Stock Market Basics, stock market for beginners |
A full service broker or a discount broker is likely to offer three types of accounts which are namely Cash Acoount, Margin Account and Discretionary Account
Understanding each type of account is beneficial for the purpose of the kind of trading you wish to engage in and the also the amount of risk you are willing to take.
Cash Account - Stock Market for beginners means using cash upfront to buy certain stocks and then sell them at a profit. For this simple type of transaction the most simple type of account that is offered by the brokerages is the cash account.
Most online and discount brokers will ask you to deposit enough money to cover your trades and that is a mandatory requirment for almost all of them. They put this money into a interest bearing account and will transfer the money to the brokerage account once you put in a trade order to buy. Same goes for the sell , that is, when you sell the stock, the cash gets deposited your brokerage account and is available for the next purchase.
A full service broker will however allow to have a leverage of three days after you put in a buy trade to pay the amount of the purchase. This is mostly based on the kind of credit worthiness the full service broker thinks you have. Three days is based on the amount of days that a trade takes to settle and the date on which the trade settles is known as settlement date (will be discussed in later posts).
Margin Accounts - A lot people will advise that the stock market for beginners means risk and then a lot of rewards but you can use your own discretion in terms of what kind of risk you wish to take and what type of rewards you would like . Margin account is based on the concept of higher risk taking and obviously higher rewards. Margin account for a behinner would mean that you can get upto 50% of the value of the trade from your broker as funding. As an example let us say you are purchasing 10 shares of X stock at $100 each, that means you would be required to have $1000 in your account or if you have amargin account you only pay $500 and the rest of the money is paid by the broker.
Now how the reward is higher in this case is that suppose that stock went upto $150 then you would have earned a total of $500 as a profit. Now since you only paid $500 in the beginning because you had a margin account your return on investment is 100% whereas if you would have had a cash account you would have paid $1000 and your return on investment would have been 50%.
Now you would argue where is the risk and the risk is in the fact that when the stock falls then the broker can issue a margin call which means two things either you can deposit cash into the account to raise the value of the money borrowed or you can sell the stock to pay off the broker.
Discretionary account - This gives the broker to sell or buy the stock without notifying you. Now as a beginner do not ever go for this king of account since that means you are trusting your broker a lot and it is like giving him a blank check.
As a stock market beginner think well what options do you have and use the safest route to get your feet wet in the market before trying the riskier option.
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