The Basics of Brokerage Accounts

Brokerage accounts are similar to prepaid credit accounts. You place money with your broker when you open an account, and you can use this money to trade securities through your broker. In order to trade, there must be money in the account. Profits from trades can be deposited in the account to raise your credit limit, and withdrawals can be made if you need a little cash. The regulation of brokerage accounts, though, is extremely important in avoiding negative financial losses.

Restrictions on Account Activity

Each broker will have several types of brokerage accounts available. The difference between the accounts will occur in both the cost and function. For example, you may have to pay higher management fees or deposit a larger principal sum in order to get the most functional account. An investor with $100,000 to trade will receive more trades each year than an investor with only $10,000 in the account. The $100,000 investor is paying more through management fees, and these fees will directly translate to more options and better service. For example, this investor may qualify for unlimited trades, while the lower investor may see a trade cap each term or year.

Minimum Account Levels

All brokers will have a minimum account balance acceptable on a brokerage account. This is maintained in order to protect both the investor and the broker. For example, if an investor continues to lose money and the account balance drops, a broker may want to close the account and collect fees immediately. This protects the broker from a loss if the account dips into the negative and the account holder cannot pay. Some brokers may even set levels because they prefer to work with sophisticated investors. This opens up the possibility for more sophisticated trades, and brokers tend to earn higher margins on these trades.

Margin Accounts and Calls

Many brokers permit their clients to buy on margin. This means the investor can borrow shares of a security from a broker rather than purchasing the security directly. This is a common technique in a short sale practice. The investor borrows shares, sells them for a profit, re-buys them later at a lower price, and then returns them to the broker. As long as the shares are returned satisfactorily, the broker is satisfied. However, if the account begins to dip too low, the broker may issue a margin call. This means the investor must either deposit more money in the account or replace the shares immediately in order to bring the account back up to an acceptable level.

Fees and Withdrawal Structures

Each time an account holder trades from a brokerage account or makes a withdrawal, there will be fees. This is how most brokers earn the bulk of their cash. Some brokers will limit the number of withdrawals clients can make each year, and others will simply require a higher fee for withdrawals over the limit. The same structure options can be used for transaction fees. An investor should look for a brokerage account with low fees, but he or she should not compromise the flexibility to trade freely in the name of low costs.

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