Which Type of Brokerage Account is Right for You?

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Before you can begin trading stocks, you must open an account with your broker. Depending on what type of stockbroker you choose, opening an account can range from a very personal to very impersonal process.

There are several different types of accounts that most brokers offer in addition to the level of service you receive from the different types of brokers. First, let’s look at how the two basic different type of brokers set up accounts and then we’ll look at the different types of accounts.

Full-service Broker

A full-service broker will want to sit down with you and your spouse or partner and go over your financial situation in some detail. He or she will want to know about any debts, cash in the bank, any stock or mutual funds you own, retirement plans, insurance, home ownership, kids, and so forth.

It’s not that they are nosey – they are required to gather this information before they can make recommendations to you regarding investments. In the business, it’s called, “know your customer.” If a broker makes an inappropriate investment recommendation to someone because he or she did not take the time to find out all about the customer’s financial circumstances, the broker can face severe penalties.

This is one of the services you buy with the commissions you pay a full-service broker – recommendations that are appropriate for you individual financial situation. Many investors consider it money well spent.

Discount/Online Brokers

You are on your own in determining if stock is right for you. Some particular types of investment (options, futures, and other high-risk investments) require you to certify that you are a knowledgeable investor, able to understand the risks associated with the product.

Account Types

There are several types of accounts that most brokers offer. They include:

• Cash Accounts
• Margin Accounts
• Discretionary Accounts

There may be others that are particular to individual brokerages, but they will be variations of one of these three.

Cash Accounts

A cash account is the simplest type of brokerage account and the first one you will open.

Online and discount brokers will most likely require you to make a deposit with enough money to cover your trade before they will open your account. Many will place this money in an interest-bearing account until you are ready to trade. When you place a buy order, the broker transfers the money to the brokerage account to cover the trade.

When you sell a stock, the broker will deposit the proceeds in the account (unless you instruct them otherwise), so cash is available for the next purchase.

With a full-service broker, you may have three days to pay for your purchase depending on the broker’s policy. Trades must be paid for or “settle” within three days. This is called the “settlement date” and if you are a good customer with good credit, a full-service broker will give you those days to pay.

Some brokers allow you to pay for trades with a credit card, however unless you can pay off the balance as soon as you get the statement, don’t even think about doing this. No stock can overcome the 19% interest credit cards charge.