How To Start a Trading Account

There are a few important variables to consider when deciding to open a trading account. First, you must decide where you are going to open the account, whether you want the trading account to be professionally managed, and which type of trading account to open.

An investor must ask herself, which brokerage firm is the best for me? There are several dozen brokerage firms to choose from, and each one has unique advantages and disadvantages. Some firms specialize in high net worth investors that will be placing a few very large dollar amount trades, and some are called discount firms which specialize in working with many investors that will be placing many small dollar amount trades. Discount firms make their money primarily from stock trade commissions, and the high net worth firms make their money primarily from charging a fee for the overall service of managing the money.

The investor that is interested in purchasing a variety of different securities such as bonds, mutual funds, stocks, or to have an advisor create an asset allocation model based on the investor's investment objectives, would most likely be better suited with a trading account at a high net worth firm such as Merril Lynch, Morgan Stanley or Goldman Sachs. On the other hand, an investor that is interested only in his own stock picks without any or limited advice from a broker or investment professional would be better off going with a discount firm for his trading account.

Often, both the high net worth and discount brokerage firms have the ability to display an investor's account and allow trades over the internet. The core difference between the two brokerage firm types online ability, is the amount of commission charged to place a stock trading transaction. The high net worth firm which specializes in asset allocation or money management would offer this online trading option to their clients as a matter of convenience, not because the investor is necessarily looking to save money on stock trades. The discount brokerage firms, on the other hand, offer online trading accounts for their clients almost exclusively, as these types of investors wants to place many stock trades on their own and are looking to save money on commissions.

Lastly, an investor needs to decide the type of account he/she would like to open. If the investor is single, she would most likely opt to open up an individual account in her name only. If the investor is married and will be filing taxes jointly with her spouse, she would be better off with a Joint Tenants with Rights of Survivorship Account (JTWROS). There are other types of accounts such as Trust Accounts and Investing Club Accounts, but the Individual and Joint Accounts are the most common.

In conclusion, it is a smart and prudent move to open up any type of trading account. Many people know that bank deposits are covered by the FDIC for up to $100,000. Few people know that standard liquid-cash deposits to a brokerage account not only get a higher interest rate than a bank savings account, but they are usually insured by a private AAA rated insurance company of up to $50 million dollars.


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