If you have dabbled in the world of personal investing, you know that investments range from safe, conservative investments like U.S. Treasury bonds to high risk speculative investments like startup technology stocks. Some types of investments and some investment strategies require different kinds of investment accounts. Four common types of accounts that you might need include a cash account, a margin account, an options account and a qualified retirement account.
A cash account, sometimes referred to as a standard account or a regular account, is the primary type of investment account. A cash account allows you to buy and sell a variety of securities and other investment products on a cash basis. For example, if you want to buy $1,000 worth of stock, you must have $1,000 in your cash account to pay for your purchase.
A margin account gives you a bit more leverage when it comes to buying certain securities. A margin account is a loan account. With a margin account your broker agrees to loan you a percent of the equity in your account -- typically toward the purchase of additional marginable securities. For example, if you want to buy $5,000 worth of stock, you could deposit $2,500 into your margin account and your broker would loan you the additional $2,500 to purchase the stock. You would then have $5,000 worth of stock in your margin account. Your broker will charge you interest on the loan until you pay it back.
Options are financial contracts that give the options holder the right, but not the obligation, to buy or sell a particular security at a set price for a specific period. Trading options is a sophisticated investment strategy that is not appropriate for all investors. If you want to trade options, you'll have to open an options account.
You can get significant tax benefits by holding your investments in a qualified retirement account such as a traditional or Roth individual retirement arrangement. IRA accounts must be either a trust account or a custodial account, but most firms that provide investment brokerage services can serve as a trustee or custodian. You cannot mingle your regular funds with your qualified retirement funds, so if you want to gain the tax benefits, you'll have to set up a separate account.
Video of the Day
- Jupiterimages/BananaStock/Getty Images