There are various types of brokerage accounts and it is important you understand each one before proceeding to invest. A margin account and a cash account are the two most common types but there are also other ones to choose from.
Each one of these accounts serves different purposes according to their needs. So what are the types of brokerage accounts?
In our previous articles, we wrote about:
We discussed how a brokerage account works and the best types of this account to open as an investor.
In this article, we will discuss the various types of brokerage accounts in other to help investors understand some other types to choose from.
Once you have decided to dedicate your funds to buying securities, the first thing you look forward to is opening a brokerage account. This comes after you have done enough research and findings about your investment option. Remember you need to understand what a brokerage account is and how it works.
The next step you take towards opening a brokerage account is to get acquainted with the various types available. Let us see below the types of brokerage accounts available.
Margin brokerage account
A margin brokerage account is one in which an investor can borrow funds from a broker or firm to purchase securities. In this account, before the loan is issued, the investor has to deposit some money called the initial margin.
This initial margin should come from the investor’s pocket serving as collateral for the amount of securities the investor proposes to purchase. Then upon depositing the initial margin the investor can go ahead and get a margin loan.
The additional fund to borrow is usually a certain amount equal to the value of securities in the investor’s account. Getting a margin loan can help the investor trade securities in a larger position than on a personal fund.
This can help in expanding profit if the investor’s investment performs well. However, if the market becomes unfavorable the investor might lose and will have to pay for losses.
Cash brokerage account
A cash account is almost antonymous to a margin account. This account requires that the investor makes a full deposit of the amount to use for the purchase of the security. There is no opportunity for a margin loan thus; the only amount the investor can afford is used to purchase the stocks.
In simple language, a cash brokerage account is almost like a bank cash account where you deposit your own money. You can only invest the available funds in your account. This cash brokerage account is simple and straightforward.
That is why it is best recommended for beginner investors and investors who do not want to incur additional risk through borrowing. Note that: an investor can have more than two brokerage accounts.
Joint brokerage account
This type of brokerage account is held by either two or more persons. It is mostly common among family members like the two couples or between the parent and the child.
If you consult your broker before the commencement of a joint brokerage account you will be informed on all you need to know. For instance, both parties can access the account and are free to withdraw at any time.
Both are free to transact and make deposits too. Both can join funds together to make purchases and avoid the hurdles of a margin loan. The adverse effect is the trust and fear of betrayal from the other party.
There are some cases where an investor may be too busy with other monetary activities and need a professional for assistance. An expert in portfolio management can open a brokerage account on behalf of the client and help in managing it.
These experts can make investment decisions on investments such as stocks, bonds, and other securities for the client. These decisions are made based on the investor’s financial goals and risk tolerance.
On the other hand, the investor can entrust every management to the broker or firm to purchase and sell these securities.
In such a case the investor prefers the service of the expert to manage a brokerage account as the professional is more capable. The expert, a portfolio manager will analyze the financial market, collect and allocate classes of assets, and make proper diversification.
This managed account attracts fees from the investor to the brokerage firm or broker. The fee is usually calculated on a percentage of the securities under management.
NOTE: When a broker or brokerage firm conducts services or transactions on behalf of its client, it usually charge certain amount of fees. For instance when they conduct negotiations, make deliveries, purchases, or make sales for their clients and more. We call these services brokerage fees or commissions. There is no stipulated amount but it is calculated based on percentages and it varies according to firms.
Robo Advisor account
Sometimes the fees and commissions of a broker or brokerage firm may not be affordable, especially for beginner investors. You can choose to open a Robo advisor account with a brokerage firm, many of them offer this service.
It is a platform that uses algorithms to manage investors’ assets. In this account, a Robo advisor will stay in place of a human stock broker. The Robo advisor can help you manage your investment portfolio based on your financial goals and risk tolerance with less or no fee.
The process is as simple as the way a cash or margin account is opened. All you need to do is fill out a form by answering the required personal details and transferring your deposit.
Just like a brokerage account, a retirement account is also an investment account that gives individuals the opportunity to save money for retirement.
This account comes with a tax advantage although it has penalties for withdrawal. This retirement account comes in 401(k), IRAs (Roth IRA and Traditional IRA), and Custodian accounts.
Although a retirement account may not be a type of brokerage account it serves the purpose of acquiring income through investing in the financial market. It also serves the purpose of asset diversification.
It is important to understand that a brokerage account deals mainly with securities like stocks, bonds, mutual funds,s and exchange-traded funds. It is a type of investment account that aids investors in accessing the financial market. Understanding the various types can help you make wise decisions when choosing the type to open.
Although opening a brokerage account may be an online deal the process may vary depending on countries. This is because they are rules that regulate brokerage activities. These rules differ with countries.