Trading Account

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Trading Account

What Is a Trading Account?

A trading account is any investment account that holds securities, cash, or other assets. Trading account is most typically used to refer to a day trader’s main account. Because these investors often purchase and sell assets, sometimes within the same trading session, their accounts are subject to specific regulation. The assets stored in a trading account are distinct from those held in a long-term purchase and hold plan.

Basics of Trading Account

A trading account, like any other brokerage account, may house securities, cash, and other investment vehicles. The phrase may refer to a variety of accounts, including tax-deferred retirement plans. A trading account, on the other hand, is differentiated from other investment accounts by the amount of activity, the purpose of that activity, and the risk involved. Day trading is often defined as activity in a trading account. A day trade is defined by the Financial Industry Regulatory Authority (FINRA) as the purchase and sale of a securities in a margin account on the same day. Pattern day traders, according to FINRA, are investors that meet the following two criteria:

  • Traders who make at least four day transactions in a five-day week (either purchasing and selling a stock or selling a stock kind and closing that short position on the same day).
  • Traders whose day-trading activity equals more than 6 percent of their entire activity during that same week.

Clients may also be identified as pattern day traders by brokerage companies based on prior transactions or another fair conclusion. Clients may establish cash or margin accounts with these businesses, however day traders often pick margin for their trading accounts. FINRA imposes extra margin restrictions on investors who are considered pattern day traders.

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To open a trading account, you must provide some basic personal information, such as your social security number and contact information. Other restrictions may apply to your brokerage company based on the jurisdiction and the nature of its activity.

FINRA Margin Requirements for Trading Accounts

Pattern day trading accounts have far greater maintenance needs than non-pattern trading accounts. The Federal Reserve Board’s Regulation T specifies the minimum standards for all margin investors. In Rule 4210, FINRA introduces extra maintenance obligations for day traders. Day traders must maintain a minimum equity level of $25,000 or 25% of the value of their stocks, whichever is greater. The trader is allowed an extra buying power of up to four times the minimal need. This computation excludes equity held in non-trading accounts. If a trader fails to satisfy these standards, their broker will issue a margin call, and trading will be prohibited if the call is not covered within five days.

Key Takeaways

  • A trading account is an investment account. For the most part, however, it refers to an account used to trade securities.
  • Trading accounts require personal identification information and have minimum margin requirements set by FINRA.

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