The margin account and the cash account are the two main types of brokerage accounts. When an investor wants to start investing, the first step is to open one type of brokerage account.
This account helps the investor in purchasing and selling of various securities like Bonds, shares, and mutual funds.
Just like any other business that deals with buying and selling, you will need to open an account probably a savings or current account.
This will enable you to save, and obtain loans or overdrafts that can be used to facilitate your business activities.
A brokerage account is a financial account used by investors to purchase and sell various assets and securities. In other to open this account, the investor has to go through a brokerage dealer or a licensed investment company.
These broker-dealers are experts possessing the license to trade on various securities. As such, they have the right to act according to the direction of the investors who claim every profit that emerges from the capital.
Types of brokerage account
Investors have two types of brokerage accounts to contend with. As mentioned above we have the margin and the cash account.
This type of account allows investors to borrow money from a broker for purchasing and selling various assets and securities.
While the investment itself guarantees the means of payment but it does not prevent the investor from paying interest on the loan.
With a margin account, the investor does not need to have much cash at hand before placing an order for stock. However, they have to undergo certain requirements before establishing this account.
For example, the investor deposits some balance, equivalent to 100% of what he/she intends to purchase. Thus, it becomes advantageous for any investor who has no funds for investment.
The important thing is to be more determined to retrieve borrowed funds as well as make a profit.
A margin account can be risky because the investor has to pay back the loan even if the investment runs on loss. Although it can increase the investor’s gain as well.
The reward of a margin account
1. Rather than limiting yourself to one particular type of security, the investor can diversify in stocks, which could help to recover from another risk.
2. The investor has the greater advantage to invest more when the price of stock increases.
3. Margin account can help the investor to extend his purchasing power thereby increasing stocks
Risk of a margin account
1. Investors will stand to risk it if the worth of stocks depreciates more than the expected value, especially if the investor has already purchased the securities
2. Brokers charge interest on the loan and the investors have to pay as at when due;
A Margin Call and maintenance margin
When a broker demands the investor to increase or add up some money in other to level up the account this is a margin call. This may result from the maintenance margin, which is the lowest account balance the investor has to maintain. Where the investor defaults this, the broker sets a margin call.
In a case where the investor is unable to meet the margin call, the broker may have to level up the account by closing any open positions or choosing liquidation.
The broker may not need the investor’s consent to carry out this ordeal. Instead, they can have you pay for the cost of caring out those duties.
A cash brokerage account demands that the investor deposits the full money for the purchase of assets and securities. Unlike the margin account, an investor who chooses a cash account will not be able to borrow funds from the broker to process transactions.
A settlement is made before the purchase or sale is guaranteed. In a case where the investor acts differently, the broker under governed regulations may take strict action.
Profit of cash account
Beginners investors will experience less loss as the amount invested may restrict the loss.
Opening a cash account can be the best for both a beginner and an expert investor because of the limit to the cash so invested.
At the time of stock market fluctuation, the investor can withhold stock if the value depreciates and sell when it rises.
A margin call may not be possible with a cash account as the investor has to deposit the full fund which is the only money used for transactions.
Risk of cash account
An investor, who uses a cash account, is limited to the funds invested. Thus, the limitation may be a barrier if the investor wishes to invest more as borrowing is restricted
The best brokerage account for investors
Most investors would choose to open a cash account due to its more conservative nature. It limits the chances of incurring more loss although this account is most adaptable by beginners.
The professional investor who has been trading for a long may choose the margin, as he already understands how to prevent loss.
Again, an expert investor would want to expand investment opportunities. Therefore, borrowing funds may tend to work better in this regard.
Why do you need a brokerage account?
As an investor, you need a brokerage account to facilitate your transaction while investing in securities. Those securities like bonds, shares, and exchange-traded funds are purchased and sold with more flexibility than using another type of investment account.
The different types of brokers
Before we dive into the different types of brokers let us see who a broker is. A broker is a company or an individual who carries out financial transactions on behalf of clients. Thus, we have:
A discount broker
Discount brokers as the name implies are companies or individuals who carry out transaction orders for their clients at a reduced commission rate. They can be online firms.
Stockbrokers are experts in the stock market; they assist various clients in executing buy and sell orders. In addition, offer valuable advice on investment plans.
Full-service brokers are superiors in that they offer dedicated service that exceeds other brokers. Which also includes buying and selling orders for their clients.
The full-service brokers are more knowledgeable compared to other brokers. They have up-to-date and current information about what is happening in the stock market.
A full-service broker can provide clients with every assistance from stock investment, profit, and managing risk to retirement.