Brokerage Account

A customer’s account at a brokerage. There are three kinds of brokerage accounts. The most basic kind is a cash-management account, into which investors place money in order to make trades. There must be enough money in the account to cover the trade at the time of its execution (including both the price of the security and the commission), or the investor must be able to pay for the trade within three days (which is called the settlement date). Some brokerage firms accept credit cards to fund cash accounts, but the most require cash or a personal check. Such an account is often a good substitute for a bank account. A second, more sophisticated kind of brokerage account is a margin account, which allows an investor to buy securities with money borrowed from the broker. The Federal Reserve limits margin borrowing to at most 50% of the amount invested, but some brokerages have even stricter requirements, especially for volatile stocks. brokerages charge a relatively low interest rate on margin loans in order to encourage investors to buy on margin. A third kind of brokerage account is a discretionary account, which permits the broker to buy and sell shares for the investor without first contacting the investor for approval.

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