Opening An Online Trading Account

It's easy to open a basic online trading account

. If you are seeking more complex types of transactions, you'll also run into more complex requirements. Here"s what to expect.

Basics

For starters, you must have name, address, phone number, a Social Security number, and a residential address in the United States of America. There are certain brokerages that will ask for a form of photo identification, such as a passport or your driver's license. This is required for them to comply with the US Patriot Act.

Almost all will enquire as to whether or not you are employed and gather basic financial information, which includes your net worth and how much money you make each year. You'll be asked what your investment objectives are, and these terms ("income", "growth", "conservative", "aggressive", and "speculation") are important to understand. This isn"t because the brokerage wants to know how much they can expect to make from you, but because there are certain SEC requirements your broker needs to fulfill. This information will also be critical if you ever want your broker to suggest investments for you.

Other choices

Two account features exist with an online trading account that are really best utilized by advanced investors and traders. These features can get one into a lot of trouble if used improperly, and are known as "margin" and "options".

In a regular account, which is usually referred to as a "cash account", or "core account", when you buy a security, you pay for them directly with the cash in your account. A margin account, however, is also known as a loan account, because your brokerage will literally lend you the money to buy that security. In fact, the security itself will act as collateral. The upside is that you are using someone else's money to attempt to profit. However, there are two downsides to this approach. The first is that you are charged interest on that loan on a daily basis, so whatever return you are targeting had better exceed the annual interest you are being charged. The larger risk, however, is that you could end up losing a lot of money on the trade if the value of that security goes down. In order to protect the loan that your broker gave you, they could sell that or other securities if the collateral you have falls below a certain level. You may be given a grace period to drop more cash or other securities into the account to prevent this from happening, but your broker will still reserve the right to execute a sale.

The other major feature is an options account. This allows you to trade things like "puts" and "calls" in your account which, in simple terms, means a time-based bet on a stock moving up or down. Options are extremely complex and best discussed with your broker ahead of time.

The Most Important Requirement

The single most important requirement for online trading actually has nothing to do with a brokerage. It is determining your own risk profile. How will you feel or behave if an investment of yours goes up a lot, or crashes? Most importantly, understanding your risk tolerance will help you decide how to best allocate your assets and achieve your long term goals.

by: Danielle Taylor

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