Being informed can make the process of opening a brokerage account easier.
Before opening a brokerage account, it is a good idea to know a little bit about the different types of accounts, how the brokerage firms are paid, and what will be expected of the investor as to the procedure of opening an account.
For buying and selling securities, three types of accounts exist: cash accounts, margin accounts, and option accounts.
1.
A cash account, sometimes called the type one account, is when the investor has to pay for his purchase up front.
To be able to oversee the purchase in the fastest manner possible, the brokerages usually require a large amount of cash deposit when the account is first opened.
In addition, investment accounts like IRA and Custody have to be cash accounts.
2.
A margin account, also called cash and margin account or a type two account, is when the investor can take out loans from the brokerage firm to buy stocks against his existing securities.
To have a margin account, an investor must also have a cash account.
For stock trading, the margin is fifty percent.
That is, an investor with $25,000 in his cash account can purchase up to $50,000 of stocks.
One caveat with the margin accounts is that, should the stocks suddenly fall way down and in the investor's cash account there isn't enough money, he has to pay the loan all at once, or the brokerage has the right to sell all the securities the investor has in his account.
If the stock prices have stayed low and the sale has not met the loan, the investor may end up owing money to the brokerage firm.
In addition, the brokerage has the right to charge interest on the money owed.
To be fair, when the stock prices drop, the brokerage will warn the investor with notice called a margin call to let him deposit more money in his account.
3.
An option account has the same conditions of a margin account, except with the addition of allowing an investor to trade options on stocks and stock indexes.
For a novice investor, playing with options can be dangerous; therefore, brokers have their clients sign a statement indicating that they are familiar with the risks involved.
As to the fees the brokerages cover, most trades have been commission-based per trade and non-discretionary.
A discretionary account is when the investor lets the brokerage firm decide which stocks to buy and sell on his behalf, without the broker needing to inform the client of each step.
In a non-discretionary account, brokerage has to buy or sell stocks with the approval of the client.
Because of the concerns for account handling by the brokerage firms, additions and corrections were made to the way the fees were applied to the non-discretionary accounts.
As of October 2007, advice may be given by the brokers to non-discretionary account holders, but it is up to the client to accept or deny it, and instead of commission-based fee, a yearly flat fee may be asked.
Commission-based accounts still exist, but the investor is given more choices.
For the financial advisors, if the client's portfolio grows, compensation is based on the overall value of the portfolio.
When an investor applies to open a brokerage account, he has to present his name, address, social security or employer identification numbers, home and work phones, date of birth, employment information, and salary disclosure so that the brokerage agency can determine what type of trading the investor needs.
The investor, also, has to sign the "Payer's Request for Taxpayer Identification Number and Certification" form, which guarantees the authenticity of the investor's federal social security number.
Then, the broker will ask the investor's marital and citizenship status, tax bracket, investment experience, net worth, risk tolerance, investment objectives, and if an immediate family member is a director or a majority shareholder in a publicly traded company.
At this time, since stock trading fees may differ among firms, the investor should ask the broker about the fee system in the firm.
The brokerage firm, then, presents the investor the Securities and Exchange Commission Rule 14B-1(c).
This rule makes for the brokerage firm provide the investor's name, address and the needed information to the companies the investor will purchase securities from, but unless for communicating with the investor, the rule bars the publicly traded companies to use the investor's information for other purposes.
-- Sources: Opdyke, Jeff D.
The Wall Street Journal - Complete Personal Finance Guidebook Three Rivers Press, 2006.
Financial-dictionary.
thefreedictionary.
com/Brokerage+Account http://www.
finweb.
com/investing/types-of-brokerage-accounts.
html invest-faq.
com/cbc/trade-broker-accts.
html -
Before opening a brokerage account, it is a good idea to know a little bit about the different types of accounts, how the brokerage firms are paid, and what will be expected of the investor as to the procedure of opening an account.
For buying and selling securities, three types of accounts exist: cash accounts, margin accounts, and option accounts.
1.
A cash account, sometimes called the type one account, is when the investor has to pay for his purchase up front.
To be able to oversee the purchase in the fastest manner possible, the brokerages usually require a large amount of cash deposit when the account is first opened.
In addition, investment accounts like IRA and Custody have to be cash accounts.
2.
A margin account, also called cash and margin account or a type two account, is when the investor can take out loans from the brokerage firm to buy stocks against his existing securities.
To have a margin account, an investor must also have a cash account.
For stock trading, the margin is fifty percent.
That is, an investor with $25,000 in his cash account can purchase up to $50,000 of stocks.
One caveat with the margin accounts is that, should the stocks suddenly fall way down and in the investor's cash account there isn't enough money, he has to pay the loan all at once, or the brokerage has the right to sell all the securities the investor has in his account.
If the stock prices have stayed low and the sale has not met the loan, the investor may end up owing money to the brokerage firm.
In addition, the brokerage has the right to charge interest on the money owed.
To be fair, when the stock prices drop, the brokerage will warn the investor with notice called a margin call to let him deposit more money in his account.
3.
An option account has the same conditions of a margin account, except with the addition of allowing an investor to trade options on stocks and stock indexes.
For a novice investor, playing with options can be dangerous; therefore, brokers have their clients sign a statement indicating that they are familiar with the risks involved.
As to the fees the brokerages cover, most trades have been commission-based per trade and non-discretionary.
A discretionary account is when the investor lets the brokerage firm decide which stocks to buy and sell on his behalf, without the broker needing to inform the client of each step.
In a non-discretionary account, brokerage has to buy or sell stocks with the approval of the client.
Because of the concerns for account handling by the brokerage firms, additions and corrections were made to the way the fees were applied to the non-discretionary accounts.
As of October 2007, advice may be given by the brokers to non-discretionary account holders, but it is up to the client to accept or deny it, and instead of commission-based fee, a yearly flat fee may be asked.
Commission-based accounts still exist, but the investor is given more choices.
For the financial advisors, if the client's portfolio grows, compensation is based on the overall value of the portfolio.
When an investor applies to open a brokerage account, he has to present his name, address, social security or employer identification numbers, home and work phones, date of birth, employment information, and salary disclosure so that the brokerage agency can determine what type of trading the investor needs.
The investor, also, has to sign the "Payer's Request for Taxpayer Identification Number and Certification" form, which guarantees the authenticity of the investor's federal social security number.
Then, the broker will ask the investor's marital and citizenship status, tax bracket, investment experience, net worth, risk tolerance, investment objectives, and if an immediate family member is a director or a majority shareholder in a publicly traded company.
At this time, since stock trading fees may differ among firms, the investor should ask the broker about the fee system in the firm.
The brokerage firm, then, presents the investor the Securities and Exchange Commission Rule 14B-1(c).
This rule makes for the brokerage firm provide the investor's name, address and the needed information to the companies the investor will purchase securities from, but unless for communicating with the investor, the rule bars the publicly traded companies to use the investor's information for other purposes.
-- Sources: Opdyke, Jeff D.
The Wall Street Journal - Complete Personal Finance Guidebook Three Rivers Press, 2006.
Financial-dictionary.
thefreedictionary.
com/Brokerage+Account http://www.
finweb.
com/investing/types-of-brokerage-accounts.
html invest-faq.
com/cbc/trade-broker-accts.
html -
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