Trading Basics: What is a Trading Account?
One of the most important things you can have as a new trader, is information.
A lot of people make the mistake of jumping into trading without knowing enough. Unfortunately, this means that you’re more likely to make mistakes in your financial strategies. The good news is that there are plenty of ways to learn today. The online world makes information quickly, and easily accessible for all of us.
To help you begin your adventure into the trading environment on the right track, we’re going to cover the basics of one of the most important terms.
What is a Trading Account?
Trading account is used to refer to any investment account you make that contains value holdings like cash, securities or any other type of belongings you might have. Often, your trading account will describe the primary account that you use to purchase stocks, futures or Forex. It’s also the account that you put money back into when you want to invest in new assets.
Usually, the term is used most often by day traders. These investors engage in multiple sales and purchases every day. Their accountsare generally subject to specific regulations as a result. For instance, the assets in the account will be removedfrom other assets in that person’s investor’s “long-term” strategy.
What Does a Trading Account Do?
A TA is there to hold onto your cash, investment vehicles, and securities – just like a bank or brokerage account. The broad nature of the term means that it’s often used by a number ofdifferent people to describe different things, including tax-deferred accounts.
One of the biggestfeatures that distinguishes a TA from other accounts used for investment is the level of activity and risk within that account. The constant activity within a TA usually happens with day-traders. According to the Financial Industry Regulation Authority, day trades are the purchase and sale of an asset within the same day. To be defined as a day trader, and therefore eligible for the specific rules of a TA for day traders, you’ll need to meet with some criteria. For instance, you’ll have to make at least 4trades over the course ofa 5-day week. Additionally, you’ll need to ensure that your activity in day-trading investment accounts for more than 6% of the total investment activity you pursue in the week.
Some brokerage firms will identify their clients as “pattern” traders rather than standard day traders. In these cases, the firms can allow their customers to open specific margin or cash accounts. Typically, day traders rely on margin accounts for their trading.
FINRA regulations enforce specific requirements for identifying pattern accounts. The maintenance required for these accounts is typically a lot greater than it would be for someone who invests in non-pattern trading strategies. For instance, you will need to make sure that you have a base level of equity in your account of at least $25,000 to be eligible for a pattern account. Or, you may need to maintain 25% of your securities values in your account- whichever amount is the highest.
With a pattern account, you will be able to maintain a purchasing power that allows you to buy securities up to four times any excess for the minimum requirement. Additionally, the equity that is withheldfrom the account in other accounts that aren’t usedfor trading will not be usedin the calculation. Traders who don’t meet the requirements cannot use a pattern account.
If you like this article than you might also be interested in reading our reviews: