The trading account is opened at a bank or other financial institution and is usually managed by an investment dealer. Traditionally, stocks are the most common financial instrument held in a trading account, but cash, including foreign denominations, and other financial instruments such as bonds, options, commodities, futures and derivatives may also be held.
Trading is the frequent buying and selling of financial instruments with the aim of achieving returns that exceed the buy-and-hold strategy widely used in investing. Trading profits are usually achieved by buying at a low price and selling at a higher price after a short period of time. Trading profits can also be achieved by selling at a high price and buying at a lower price to cover the position. This is called a “short selling” strategy, which is executed in a falling market.
Features of a trading account
Both individuals and companies can open trading accounts and deposit a certain amount of money to conduct trading operations. The minimum deposit amount is usually set by the financial institution and sometimes even by state law.
While trading accounts are typically considered for shorter-term transactions than investment accounts with a broker, there is no specific regulation that defines the boundary between them. The period during which an open position is held in a trading account is based on a strategy implemented by the trader. A position trader can hold an open position for months to several years. Swing traders typically keep their positions open for days to several weeks, while day and scalp traders do not hold their positions overnight.
Before opening a trading account, it would make sense to familiarize yourself with the different types of trading accounts and other options available. The easiest way to open a trading account is to visit an online brokerage website. There you will find all information about the services offered including trading accounts.
Utilization of a trading account
While a cash account determines that you can place a trade using only the amount of funds that are in your account, a margin account, on the other hand, involves a line of credit offered by your broker and you can use it to enter more positions that exceed your actual cash balance. When using a margin there is an interest applied for positions held overnight. If interested in margin, the brokerage could offer you several levels of leverage depending on size of your account. For example, if you hold 10,000 USD, leverage of 2:1 would allow you to purchase securities with total value of 20,000 USD. Also, it must be pointed out that in the same manner as higher profits are reachable, you are also subjected to higher losses that can even surpass your initial investment.
