Types of Brokerage Accounts


Cash accounts are traditional brokerage accounts and are also known as a Type 1. When buying securities, the investor must pay the full amount of securities purchased with cash, and most brokers will require funds to be in your cash account before you can place any type of order. In this case, the broker does not offer any support or funding to investors. If you deposit $1000 into your cash account, your buying power for stocks is also $1000. This account is relatively straightforward and optimal for beginners. They offer a breadth of services, covering nearly all functions that investors need.


Margin accounts are more complex and subject to more regulation, enabling investors to buy more stocks than they have cash in their account. With a margin account, you can borrow certain amounts of money using the cash and securities you already have in your account as collateral. Like loans, you incur interest costs when you buy securities on margin, though they are typically low in order to encourage business transactions. Margin accounts are a double-edged sword, however, and come with important caveats. If the value of your securities decline, your brokerage firm may demand you to deposit cash or securities to cover the shortfall, or they may even sell some securities in your account without advanced notice. This may occur even if your brokerage account notifies you beforehand and gives you a certain number of days to cover the shortfall. Margins are for more advanced traders and for those who can tolerate the associated risk. While they may increase the value of your returns, it also increases the risk of losing money, forcing you to sell when it may be inopportune, as previously mentioned.


Discretionary accounts are for those who have another person buying or selling stocks on their behalf. This is typically for a registered investment advisor, and these accounts are not used if you are self-directing your portfolio.


Subscribe To Our Newsletter