What is a 'Trading Account'
A trading account is similar to a traditional bank account, holding cash and securities, and is administered by an investment dealer. The account is held at a financial institution and administered by an investment dealer that the account holder uses to employ a trading strategy rather than a buy-and-hold investment strategy.
BREAKING DOWN 'Trading Account'While trading accounts are traditionally thought to hold only stocks, a trading account can hold cash, foreign cash, securities and other types of investments. Investors who use several trading strategies or have numerous brokerage accounts may separate their accounts in order to avoid confusion.
Individuals and businesses can open trading accounts to execute trade transactions involving buying and selling financial instruments, such as stocks, options, commodities, derivatives and futures. Individuals who are qualified as non-professionals can open retail trading accounts. Business entities are qualified as professionals. Professional status incurs higher market exchange data fees and can also incur higher commission rates. Commission rates may include a flat fee per trade or a per-share fee depending on the brokerage firm.
Investors can open trading accounts online or at a brokerage office. An investor could open multiple accounts for different purposes, such as a registered account for retirement savings, a buy-and-hold account for long-term stocks, a margin account, and a trading account for conducting day-trading activities. For stocks and options, a minimum of $25,000 in account equity is needed to clear the Pattern Day Trader rule, which is regulated by the Financial Industry Regulatory Authority (FINRA). This rule requires a $25,000 minimum amount in the account to trade more than three round trips during a rolling five-day period. Violation of the rule can result in account restrictions.
Day Trading Margin
Trading accounts are usually associated with day trading. Day trading carries the risk of complete loss of investment or more. The largest risk tends to stem for the use of margin. Day trading margin for non-IRA accounts is usually leveraged at four-to-one during market hours. This means that only 25% of cash would be required to purchase or short a marginable stock. Individual brokerages may apply margin restrictions on specific stocks due to volatility and short interest. It is very important for a trader to double check the maintenance margin requirements on the stocks that they are trading in the account. In a worst0case scenario, it is possible to get short-squeezed and experience a forced liquidation from an intra-day margin call.