Beginning Trading

It is possible to buy shares of stock in the over-the-counter market without a broker, but your choices are severely limited.  Only a select few companies offer OTC trades to the general public, most focus on those who work within the company.  If you want access to a full range of businesses, it is necessary to open an account with a broker.  The different types of brokers have all ready been discussed.  Hopefully, you have all ready evaluated what you are looking for in a broker and have selected whether you want independence or guidance along the way.  For the sake of this article, I will assume that you know the basics of the interaction you are looking for.  Still, there are choices to make since brokers offer different types of accounts.  You must be knowledgeable of the account type that you ultimately decide upon before you begin trading.                

For beginners, I recommend opening a cash account.  Here, money is placed in an account with a broker prior to trading.  Most reputable brokers will pay interest on this account if it sits for a while before trading begins.  The money in the account is the source of payment for all share purchases.  If you don’t have enough in your cash account to fulfill a transaction, the transaction doesn’t take place.  When you decide to sell your shares, the proceeds go back into your cash account.               

A margin account is an account that uses borrowed money to purchase shares.  A small amount of money is placed in an account with your broker as collateral and the broker provides the rest needed to fulfill the transaction.  This does not eliminate risk, though.  If the amount in your margin account drops below a certain percentage because of a severe decline in the price of the stock, the broker is entitled to make a margin call.  A margin call is basically a bill for the money borrowed.  Margin accounts are, however, a way to make money without fronting much money, but before you get involved in these, it is mandatory that you know the risks involved.

Another type of account is a discretionary account.  These are only offered by full-service brokers.  Money is deposited in an account with the broker just like a cash account, but the money is not controlled only by the client.  An agreement is signed by both parties giving the broker a degree of control over which stocks are purchased, at what prices, and for what amounts.

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