Blog What Is a Trading Account?

What Is a Trading Account?

A trading account is a type of investment account that can encompass diverse assets, including cash, securities, or other holdings.

What is a trading account compared to other accounts? It’s distinguished from different investment accounts by the activity level, which usually consists of day trading.

If you’re thinking of opening a trading account, it’s essential to do your research first.

This guide covers the basics of why you might want to open a trading account, explains how to start one, and details what to do with it once it’s opened.

What Are the Benefits of a Trading Account?

You now know the answer to the question, “what is a trading account?” Next, you’re probably wondering why you’d bother opening one.

Trading accounts have some clear benefits when it comes to managing your investments. Here are a few of the highlights:

  • Single point of access: You can access multiple assets via a single account, depending on the account provider.
  • Easy transactions: Modern technology allows you to make trades online easily.
  • Flexibility: You can access online trading accounts from anywhere, giving you constant oversight over your trades.
  • Personalization: A variety of trading accounts are available, with different levels of customer service and customization. For example, some provide research for you.

Note that trading accounts require your identification to open. You may have to provide details like a residential address and social security number.

Further, such accounts have minimum margin requirements set by the Financial Industry Regulatory Authority, FINRA. Familiarizing yourself with the relevant legislation can ensure you remain compliant.

How to Start a Trading Account

If you want to start a trading account, you’ll have to take a few steps. Don’t rush the process and open the first account you find overnight.

Take your time and do your research to find the best option for you. Here’s what you can expect.

Decide on an Investment Style

There are many different ways to invest. If you are an informed consumer with trading knowledge, you can research and decide what to trade yourself.

However, if you don’t have the time or expertise, you may want to outsource the job to someone else.

Further, there are different means of investing in the stock market. Popular options include individual stocks, index funds, and Robo advisors.

Deciding what kind of investments you want to pursue and how to follow them in advance will save you stress later.

Set a Budget

Trading can be a means of earning money. However, it can also be a way to lose money. Before you even open your first trading account, set a limit on how much you plan to invest. 

Markets are volatile, and you can’t predict what will happen in the future.

As a rule of thumb, it’s wise to set aside an emergency fund of cash you can access at any time if you need to. This should cover one year’s worth of living expenses, including rent and utilities.

Don’t invest your emergency fund, so you always have it to fall back on.

With your budget set, you can start thinking about how you want to allocate your assets.

Generally, the older you are, the less wise it is to invest money in stocks. This is because you have less time before you retire to ride out fluctuations in the market.

As you get older, it’s better to invest in more steady and less volatile assets, like mutual funds and ETFs.

Again, if you aren’t knowledgeable about this field or don’t have time to do your research, you may want to consider consulting a licensed financial professional for advice.

Open Your Account

With the background research complete, you can go ahead and open your investment account. There are many popular providers, from TD Ameritrade to Charles Schwab.

However, you have to decide what type of account you want to open first.

You will likely want either an IRA, individual retirement account, or standard brokerage account if you’re new to the field.

With either option, you can buy ETFs, mutual funds, or stocks. Note that accessibility to an IRA will be more limited than to a brokerage account.

Once you know what type of account you want to open, you can start comparing providers. 

Check details like customer service level, trading commissions, and educational resources available. Note that some online brokerages offer physical branches, which can also be handy.

If it’s possible to have a free trial of a trading account, take advantage of it. This will give you a chance to see just how user-friendly it is. It’s a great comparison shopping tool and well worth putting some time into.

Note that you’ll be required to provide vital personal details when opening an account, such as your name and residency.

Other information, like a social security number, may be necessary depending on your citizenship and residency.

Start Investing

Once you’re all set up, it’s time to start investing.

When choosing stocks, aim for beginner-friendly investments. In general, it’s wise to diversify your portfolio. Then, if one area underperforms, you can still maintain an overall stable portfolio.

Additionally, a good rule of thumb is to invest only in types of businesses that you understand.

Until you’re more educated about investing, steer clear of highly volatile stocks. Penny stocks are also a bad idea for novice investors, as they can be pretty risky.

As you continue investing, take the time to educate yourself about the process.

It will help if you familiarize yourself with the methods available for evaluating a stock’s strength. Examples of metrics include return on equity, free cash flow, and price-earnings ratio.

Finally, maintain constant vigilance regarding your trading account. Check regularly and see how things are going.

Most importantly, continue to invest. You don’t have to make risky moves in hopes of making fast cash. Instead, consistency and long-term commitment are the safer bet.

The Final Word: What Is a Trading Account?

Starting a trading account requires a bit of research and effort. However, it can be well worth it, giving you the freedom you need to invest in various assets, from mutual funds to stocks.

Trust the guide above as a starting point to help you through the process.