How to Open Your First Trading Account

Thu Dec 10, 2020, 02:16 pm | by Charles Munyi | No comments

Opening a trading account is the prerequisite for any budding investor. Since trading transactions went electronic, it has never been easier to buy and sell securities such as stocks, bonds and mutual funds. You’d obviously be captivated by the fact that you can open a trading account online or through a mobile app, but is that it?

Let’s face it: opening your first trading account isn’t easy — you’ll naturally have a myriad of questions. “What type of account should I open? Can I bundle all my investments in one account? What are the minimum balance requirements?” These questions may be overwhelming to the rookie investor, but let’s take the guesswork out of opening your first trading account with our step-by-step-guide.

What is a Trading Account?

A trading account is what you’d typically use to purchase stocks — in relation to investing. However, a trading account can hold more than stocks — you could use it to hold cash, securities and other investment vessels.  And similar to a bank, you can conveniently transfer funds in and out of your trading account.

A trading account will essentially facilitate transactions like stock trading, mutual fund investments, ETFs and more. Besides, it can help you keep tabs with cash, foreign currencies, securities and other transactions. You may open several trading accounts with multiple brokers for purposes, including:

  • Day-trading activities
  • Retirement savings
  • Long-term investment

Most brokers will let you open a trading account online with no initial deposit — but you must fund your account to place any trades. Your broker holds the trading account and acts as the intermediary between you and the investments you want to purchase. You own the investments and money in the trading account, and can sell your investments at any time.

Trading accounts vary incredibly, but most will let you enjoy a host of benefits, including:

  • One-point access. A trading account gives you access to multiple exchanges across the stock market through a common platform. Trading now becomes a 1-click activity.
  • Market insights. Trading is all about making the right decisions, and most online trading platforms extend valuable services like market analysis and research reports from their experienced trading professionals.
  • User-friendly trading. Most brokerages now offer an intuitive mobile app that lets you trade on-the-go.
  • Low trading fees. Most trading accounts let you execute stock and ETF trades for free. Commissions are also usually on the down-low.

Remember, trading accounts aren’t all equal — some will have high trading fees and commissions while others will have a sophisticated trading platform. Be sure to weigh the pros and cons to get the best value.

How to Choose a Brokerage

If you want to open a trading account, you’ll most definitely want to have a good broker associated with the account. Picking a brokerage is often based on your investing style, so take your time to research your options. But, how do you pick a broker with so many options to choose from?

From the get-go, most brokerages seem homogenous, offering similar services. Only after a careful assessment will you notice the differentiating factors, which include:

  • Account minimums. Some brokerages will require you to maintain a certain minimum balance to execute trades. Consider the amount of money you’d like to leave in your account since some account minimums may be quite high.
  • Transaction costs. You’ll incur a transaction cost each time to sell or purchase financial products like stocks. If left unchecked, transaction costs may significantly eat into your profits. Your brokerage may also charge a commission on the trade’s transacted value. Assess how the costs and fees rack up depending on your trading style and frequency.
  • Trading platform. Ease-of-use is a key aspect to consider when assessing a trading platform. You want an intuitive platform that eases your trading with customizable features and multiple charting indicators.
  • Educational support. A brokerage shouldn’t just provide the platform, it should also complement your trading style and strategies with market commentary, insight and research. If you’re a rookie trader in particular, you’ll want to work with a brokerage that provides valuable educational material.

After determining how each brokerage scores for each of the factors above, you’ll want to decide whether you’ll use a cash or margin trading account.

Cash Trading Account

A cash trading account allows you to perform transactions only with the funds available in your trading account. Cash accounts don’t permit borrowing money from a broker — you must pay for all trades in cash and by the stipulated settlement date. This will not only reduce your purchasing power but also restrict your ability to place trades more often. You must also wait until a trade is settled to withdraw the cash you raised from your sell order.

On the flip side, cash trading accounts help mitigate the risk of incurring huge losses. Cash trading accounts are a more conservative choice.

Margin Trading Account

Margin trading accounts often involve getting into a credit arrangement with your brokerage. You can borrow some money from your broker to leverage returns, make additional investments or for cash flow convenience as you await trades to settle. A margin account lets you borrow against the value of your stocks and investments. In return, the broker charges an interest on the amount you borrowed.

The limits on margin loans will vary by broker, but most brokers will let you borrow at least up to 50% of your investments. A margin account can let you secure additional cash if you want to purchase a stock immediately or need to withdraw money from your brokerage but your funds have come short.

The primary risk of using a margin account is that should your current position drop in value, you may end up with losses that compel the broker to close your position. Ensure you understand how your brokerage account structures its margin terms to understand the level of risk you’re exposed to.

What to Do After You Open Your Trading Account

You’ve opened your trading account, what next? For starters you’ll need to think about your account funding options — how to add money to your brokerage account. Your initial funding could be made via an electronic funds transfer from your existing bank account. Other brokerages will give you the option to fund your account through check — just mail it to them and they’ll take care of the rest. Other funding options to consider include wire transfer, asset transfer, and stock certificates.

Remember, brokerages impose a minimum deposit requirement for opening a new account — it could vary from as low as $0 to as high as $100,000. Ensure you can meet the minimum deposit requirement, otherwise, you’ll have to wait a little bit longer to start trading.

After funding your account, you’ll need to take the time to explore some of the brokerage tools. Most brokerage firms typically offer a barrage of handy tools and features that can guide your first trading steps. And if the tools don’t suffice, you may need to subscribe to other trading essentials that can guide your investment strategy with news, data, and in-depth analysis. 

Top of the list is Benzinga Pro, a go-to source for real-time news, market monitoring activity, up-to-the-minute feed of the top market gainers and losers, and commentary. This tool will provide you real-time knowledge without breaking the bank — starting at just $99 per month. Click here to start your free, two-week trial (no credit card required).

Final Thoughts

Congratulations! Your trading account is now up and running, and you’re eager about the gist — investing in stocks, bonds, or mutual funds. As excited as you may feel, remember you’re still in incubation. Spend some time to learn the basics of trading — including how to responsibly pick investment vehicles. This will help you avoid losses and create a diversified portfolio.

Disclaimer: Benzinga is a news organization and does not provide financial advice and does not issue stock recommendations or offers to buy stock or sell any security. Benzinga Pro is for informational purposes and should not be viewed as recommendations. Benzinga Pro will never tell you whether to buy or sell a stock. It will only inform your trading decisions. You can find our full disclaimer located here.