A trading account is a must for everyone who wants to invest in stock markets.
What Is a Trading Account?
It is an account in an online stock exchange that contains securities, stocks, cash, or other investments. A trading account is held by a financial institution and managed by a broker. The activity in a TA typically involves day trading. According to FINRA (Financial Industry Regulatory Authority), a day trade is the purchase and sale of a security on the same day in a margin account.
To open a trading account, you must provide a lot of personal information that is required for tax
tracking, account handling, transaction verification, and other purposes. Besides, a broker must find out if the investor can handle risk, which they determine according to the following levels:
Aggressive growth: Readiness to take extra risk to get more rewards.
Simple growth: Willingness to gain money in the account while saving the original capital.
Income: Intention to use profits from the account as a source of income.
Capital preservation: Intention to use the account only to save and protect the existing assets.
There are two types of trading accounts: a cash TA and a margin TA.
With a cash TA, you can trade by using only the amount of money in your trading account. For example, if you have $5,000 in your TA, you would be able to spend only $5,000 on your positions. Cash account holders are not allowed to borrow money and must settle your cash transactions within 1-3 days, depending on your trading platform.
With a margin TA, you get a credit line from your broker, which you can use to purchase stocks and securities. If you hold a position overnight, you should pay interest on this credit, typically 2%. You can also open a margin TA with options. Purchasing an option means that you get the right but are not obliged to buy or sell a stock at a certain price. To open a margin trading account, you must meet certain requirements, which are known as house maintenance requirements and can slightly differ depending on the brokerage.
Margin Account Requirements
The requirements for a margin account are typical as follows:
At least $2,000 of minimum margin (investment).
A deposit in the amount of up to 50% of the purchase price of a stock, which is known as an initial margin. Some brokers may require you to borrow over 50% (broker's house requirements).
The base requirements for all margin traders are outlined in the Regulation T of the Federal Reserve Board. FINRA has extra maintenance requirements for day traders. For example, they must maintain a base equity level of $25,000 or 25% of securities values and can purchase up to 4 times exceeding this requirement. A trader who fails to meet these requirements will receive a margin call from their broker and must cover this call within 5 days.
Using Margin for Day Trading
If you deposit less than $25,000 in your account, you will have the 2:1 margin. For example, if you open your trading account with $20,000, you will be able to buy up to $40,000 worth of equities. If you deposit over $25,000, many brokerages will offer you the 4:1 intraday margin. But if you spend #100,00 on your $25,000, you must maintain 50% overnight. It means that if you hold the position after 4:00 p.m. EST, you will get a margin call. As a result, your brokerage will ask you to deposit an extra $25,000, i.e. 50% of the $100,000 within 5 working days and leave this amount in your trading account for the next 24 hours. After 24 hours, you can withdraw the extra $25,000 and continue trading.