Brokerage Accounts Comparison

In order to start investing in the stock market you need a way to pay for the stocks you buy.

This is usually done through a brokerage firm which can offer you different types of brokerage accounts depending on your creditworthiness.

There are three types of brokerage accounts you can open. The first is a cash account, the second is a margin account and the third is an option account.

To open a brokerage account you will need to fill out an application, and if you are approved, deposit a set amount of money to open the account with.

In this article we will look at each of these three brokerage accounts.

Cash Brokerage Accounts

A cash brokerage account is usually given to people who have a low credit rating, or are at risk of not being able to pay back borrowed money.

A cash brokerage account involves you depositing money into your account before you are able to begin trading on the stock market.

How much you have to deposit before you can begin trading really depends on what brokerage firm you go to.

Some stockbrokers for example require you to deposit $15,000 before you can begin to trade on the stock market, while others allow you to start with $500.

Sometimes stockbrokers may allow you to open an account without depositing any money first, but this is usually done as a promotion, so it doesn’t occur very often.

Paying For Stocks

If you are trading with a cash account the money has to be deposited before the closing date for any trade you make. The closing is three days after you have made the trade.

For example, if you buy some stocks on Monday, then you would be required to pay for the stocks by Thursday. If you don’t pay, your purchase doesn’t go through.

Earning Interest On Your Cash

If you end up keeping a lot of cash in a brokerage account, ask whether your broker will pay you interest on the uninvested cash.

Very often you will find that quality brokers offer some sort of service which allows you to earn interest on the uninvested money you are keeping with them.

Margin Brokerage Account

A margin account is offered to people who have a good credit rating, and are considered to be low risk when it comes to loaning them money.

A margin account can be advantageous for a stock market investor, because it allows you to borrow money against your securities in your account so that you can buy more stocks.

So essentially, a margin account allows you to borrow money so that you can make more money.

Approval For Margin Account

In addition to having a good credit rating, you need to be approved by a broker in order to qualify for a margin account.

Once you are approved, your extra line of credit should make it much easier for you to make more money quicker than you could before.

However, there is a limit to how much money you can borrow from your account, and the margin limit is usually set around 50%.

So if you plan to buy $20,000 worth of stock on the stock market, then you would be required to have at least $10,000 in your brokerage account.

It is important to remember that you will be charged interest on the money you borrow, and although the rate you are charged will vary from broker to broker, it is usually several points higher than the brokers own borrowing rate.

Why Use A Margin Account?

You don’t have to have a margin account to buy stocks. You could just pay in cash. Most people however don’t always have so much cash to hand, so it works out far easier borrowing the money.

A margin account is therefore just like taking out a mortgage on a house. It allows you to buy something that is more expensive than you can afford, as long as you are willing to pay the interest on borrowing the money.

Option Brokerage Accounts

An option account is also called a Type 3 account, and offers you all the benefits of cash and margin accounts. The difference in having an option account is that it allows you to trade options on stocks and stock indexes.

In order to have an option account you must qualify for an upgrade to your margin account from your broker. The broker will then ask you to sign a statement saying that you are familiar with the risks involved with options.