Opening your first trading account can seem daunting given the sheer number of options out there.
Fortunately, most brokerage firms follow a straightforward process similar to the one laid out below.
Getting your account open is just a matter of choosing a broker, providing some personal information, and funding your account.
Once the formalities are done, you can begin using your account.
What is a Trading Account?
A trading account, also known as a brokerage account, is an investment account that you open with a brokerage firm in order to invest in the stock market.
Examples of brokerage firms include TD Ameritrade, Robinhood, Interactive Brokers, and E*TRADE.
Trading accounts allow people to buy and sell different types of investment securities including stocks, bonds, mutual funds, and exchange-traded funds (ETFs).
In exchange for facilitating your buy and sell orders, your broker typically charges you a commission. However, the recent trend has brokers eliminating commissions completely and replacing it with revenue from order flow.
What You Will Need to Open a Trading Account
Not all brokerage accounts are created equal, and they will often have different fees depending on their range of services.
Therefore, there are a couple of things you will need to consider before you click that “Open an Account” link.
The first thing you will have to do is decide what you will be trading – stocks, options, futures, forex, etc.
Some brokers cater to all investment types while others focus on certain ones. For instance, option traders may be best suited using a broker that specializes in options trading like Tastyworks.
Check out this post for our favorite platforms in 2022.
Once you decide on a broker you’ll need to gather some personal details to get your account set up including:
- Date of birth
- Address
- Phone number
- Country of citizenship
- Employment status
- Social security number
- Level of trading experience
Choosing a Broker
Choosing which broker to trade with can be a very challenging task especially if you don’t know what you don’t know what to be looking for.
When choosing a broker, you need pick one that best fits how and what you will be trading.
In this section, we will discuss the things you should consider when picking a broker.
Figure out the minimum account balance requirement: Sometimes brokers may ask you to deposit a minimum amount while opening your trading account. They might also require you to maintain a minimum account balance throughout the year.
Therefore, it is very important that you inquire about the minimum amount that you have to keep in your account. You can compare different brokerage firms since this requirement differs significantly from broker to broker.
Look at the commissions and fees charged: You may not have a huge budget for trading, but that does not mean you cannot start. Even though commission-free trades are currently trending, there are several other fees that should worry you, such as account maintenance fees or inactivity fees.
Margin and leverage rates: It is also important to consider the amount of leverage and margin the broker is offering for intraday trading. Basically, margin is a type of loan offered by brokers that allow traders to leverage their initial capital. In return for the loan brokers can charge an interest fee if you hold the positions overnight. Having an understanding of their fees is important because it can add up over time.
Ease of use: How intuitive and easy is the platform or site to navigate? In online securities trading, most of the trading activities happen through the brokers’ trading platform. Therefore, the trading platform provided by your broker must be stable and easy to use.
Platform Quality: With today’s technology you should expect robust trading platforms. The platform is where you will spend most of your time placing trades and studying charts so you want to make sure its stable and high quality. There are some great ones out there like thinkorswim at TD Ameritrade or LightSpeed.
Customer service: Is there a number you can call to speak to a human for assistance? What are the hours of operation for phone lines?
You should be able to contact the customer support team for the broker during regular trading hours at least.
While phone support is the ideal option when you have a problem, 24/7 chat assistance is also a bonus.
Cash vs Margin Account
There are several types of trading accounts, but mostly, they are variants of two basic account types: cash account or margin account. Obviously, there are some huge differences between the two as each one has its own advantages and disadvantages.
Here are the things you should know in order to get the right decision for you.
A cash account requires the client to pay in full for the securities they buy for their account. If they have $1,000, they can only buy $1,000 worth of securities, and cannot use the securities in their account as collateral to borrow more money.
The primary benefit of a cash account applies to those who have small trading accounts that don’t meet the pattern day trader (PDT) required margin of $25,000. The PDT rule does not affect cash accounts. BUT you can only trade on settled funds. So when you sell a position you have to wait until those funds settle, which is the trade day plus 2 business days.
On the other hand, a margin account allows clients to borrow money from their brokerage firm to buy securities, using those securities as collateral for the loan.
Traders are able to short sell stocks and trade more complex options strategies with margin accounts.
As mentioned earlier, you need to maintain a minimum balance of $25,000 on your account at all times when using a margin account to day trade. If you are not day trading then you can have under $25k in your account and still have margin capabilities.
Most day traders often opt to open up a margin account with their brokerage firms in order to access leverage and to buy and short sell stocks intraday.
Different Ways to Fund Your Trading Account
You can deposit money into your trading account by wiring money, writing a check, or transferring money from your savings or checking account.
After funding the account, you can then use the money to start trading.
Learn How to Trade
The markets are complex which makes it very easy to lose money. Beginners taking their first steps towards learning the basics of trading should look into some kind of trading education.
One of the best ways to getting started trading is to join the Warrior Trading Chatroom or become a student in our Trading Courses. We are a community based on education and have taught thousands of people how to trade the markets.
You can join our online webinars from any device and watch as our educators trade live.
At Warrior Trading, we take all of the students in our community under our wing and train them in the most important elements needed for success.
We teach students the skills to profit from the market and the fundamental skills for success including risk management, proper stock selection, stock scanning, and chart pattern recognition.
Bottom Line
With a trading account, you have the freedom to trade whatever you want—from stocks and bonds to ETFs and mutual funds.
You can invest the money whichever way you want and take it out whenever you want, and you will pay taxes when you sell for a profit and take a deduction when you sell for a loss.
At its core, a trading account holds the money you need to buy and sell securities.
Just like you need a checking account to hold your money for daily expenses like bills and groceries, you need a trading account to hold the money you use to trade securities such as stocks, bonds and ETFs