What Is the Meaning of Trading Account?
Financial investors often open several accounts at various financial institutions to help manage their assets. They use different accounts in order to perform various strategies with differing risk levels. A trading account is used primarily for day trading and short-term investments. There are many different brokerage firms and financial institutions that offer trading accounts. As a result, it is important for investors to choose the one that best fits their needs.
The Facts
Similar to a traditional bank account, investors deposit money into a trading account that is held by a financial institution. Investors use trading accounts in order to make financial investments in various securities. As a result, trading accounts are usually comprised of cash, stocks, foreign currency and other types of fairly liquid investments.
Function
Opening a trading account allows investors to take short-term positions on their securities. Most investors hold their assets in several accounts depending on their risk level. For example, some investors have brokerage accounts holding long-term conservative positions in the bond and stock markets. However, investors may choose to open up a trading account to try to take advantage of high-risk, high-return strategies.
Time Frame
Trading accounts provide investors with the ability to make short-term investments to try to earn a quick profit. Investors often use trading accounts as a way to do day trading. A day trader enters and closes out a position during trading hours on the same day. Although trading accounts are not solely designed for day trading, they are usually used for short-term positions.
Institutions
Trading accounts are held at brokerage firms and administered by an investment dealer. There are several brokerage firms that allow investors to open trading accounts. However, many of them have various requirements and fees. As a result, investors do research and pick the brokerage firm with the service and fees that meet their needs. Commission fees, minimum deposits and interest paid on cash held are all important features that must be agreed upon prior to opening up an account.
Warning
Open trading accounts with deep-discount brokers. Although they do not provide any additional service, such as trading advice, they also charge the least commission. In addition to being extremely risky and difficult, short-term trading requires many transactions. As a result, commission fees can eat up a significant portion of any return that you may gain from the trade.
