Brokerage Acounts – A Quick Explanation
A brokerage account is an agreement between an investor and a financial firm or brokerage that allows the investor to place investments thru the firm, which then carries out the transactions in behalf of the investor. Through an online broker, an investor can easily manage a portfolio that shows the performance of the securities bought and sold.
If the investor prefers using online brokers or middlemen, he or she would be charged with a fee, or a commission.
The brokerage firms charge investors different kinds of rates, from transaction rate to other miscellaneous fees depending on the types of services that the firm renders. What is a brokerage account and its different types?.
A cash account is one of the most common brokerage account wherein investors leave a full deposit with the firm so they can immediately place orders and start investing. Brokerage firms require cash, personal check or manager’s checks as payment for the transactions, and at times they also accept credit card payments. When a trade is consummated, the account should be able to cover the price of the security including the commission rate and other charges within the settlement date.
When one inquires what is a brokerage account that allows investors to borrow money from the firm, the usual response is, it is called a margin account. Brokers charge the investor with a small interest rate and require the investor’s cash account as collateral.
The limit allowed by the Federal Reserve is half of the amount invested for margin accounts but the firm can exercise stricter controls when trading volatile and highly speculative securities. The risks involved in Marginal Accounts are greater for the loan in the account will be collateralized by the securities and cash, therefore, if the stocks drops, the investor is subject to add additional money to the account or sell a portion of the stock.
Another kind of Brokerage account is a Discretionary Account wherein the investor gives authority to the broker with the decision making of the securities. Discretionary accounts require confidence and trust between parties however there is a mutual agreement to revoke the contract at any given time.
Investors who are extremely busy with career or family best suit this type of account for it is ideal to build an investment portfolio that requires minimum involvement. In all cases, a brokerage account should have up to date information regarding the investment activities and portfolio value at any given time.
