What is a trading account?
Trading refers to buying and selling financial assets to make profits from their price fluctuations. A trader needs a platform and an online trading account to start trading. In this article, we will learn what is a trading account with its types and how to choose the best account to start your trading expedition.
Here's a quick look at what you'll read
A trading account gives a person access to global financial markets to buy and sell assets and make profits.
- A trader should consider multiple factors before selecting an ideal account type, including trading fees or spreads, leverage requirements, order executions, risk tolerance ability, experience, time frame, etc.
ECN, or electronic communication, is a modern online trading account that provides traders direct access to interbank financial assets and liquidity provdiers.
A managed account is a facility for big investors. Under this, experienced and professional traders manage the investor account and place trade on behalf of the investor.
Islamic account types are based on Shariah laws; under this, Muslim traders need not pay rollover or swap charges for holding trades overnight, as these are prohibited in Islam.
- Select your broker
- Determine the account type
- Registration and information submission
- Fund your account:
What is a trading account?
A trading account gives traders access to global financial markets. It enables the trader to trade in different financial assets, including Forex currencies, cryptocurrencies, commodities, stocks, and other financial assets.
A trader or investor opens an online trade account with a broker platform to buy and sell financial assets.
These platforms provide the trader with various facilities like leverage, lot size, educational resources, trading insights, and many other services for placing trade efficiently.
Types of trading accounts
We have understood what is a trading account; however, for selecting an ideal account type, traders must understand the features, services, pros and cons of different accounts.
Broker offers a variety of accounts depending on the trading capital, experience, risk tolerance, leverage requirement, and many other factors. Let us have a look at the major trading account types:
Demo account: Best trade account to learn and practice
The first in the list is demo accounts; every trader must go for these accounts at the beginning of the trading journey. These are risk-free accounts where you can take place, trade with fake money, and learn.
The main objective of the demo account is to enable traders to experience real-life market conditions and learn how trading works.
Trading is about making and losing money in the market. However, it is not as easy as it looks; one can lose hard-earned money if trades are executed without knowledge. Demo trading makes learning easy and will help you determine whether trading is suitable for you.
Pros
- Helpful in mastering order execution.
- Risk-Free Trading
- Helpful in Backtesting
- Helpful in broker evaluation, analysis, and selection.
Cons
- Emotion-free trading.
- It does not consider slippage & gaps.
Mini accounts: Great for traders with small investment
As the name suggests, these accounts require small capital to start trading. The accounts are most suitable for beginner or novice trades with small capital and less experience.
Mini accounts allow traders to trade with lot sizes of 10,000 or 1000 units. Traders generally place small trades initially with limited risk to avoid huge losses.
Mini accounts may have several benefits, but with less risk exposure and capital requirement, facilities like financial instruments, trading features, strategies, and customization are also limited. Initially, it may be good, but it may not be suitable for a professional account.
Pros
- Low capital requirement.
- Low Risk.
- Beginner friendly.
Cons
- Not suitable for position or scalp trading.
- Limited returns.
- High trading cost.
- Limited features.
Standard Accounts: Best to enjoy traditional trading with premium facilities
These are the most popular types of trading accounts widely used by traders. It allows traders to trade with a lot size of 100,000 units. Also, placing trade allows you to take advantage of premium services like trading insights, news, educational resources, daily research reports, etc.
These are suitable for intermediate and professional traders with good market understanding and trade in a significant amount. However, these days, standard accounts are used by traders who enjoy traditional trading.
Pros
- Smooth and hassle-free order execution.
- Excellent market liquidity.
- Best for long-term trading strategies.
- Range of trading instruments.
- High leverage ratio.
Cons
- Not for novice traders.
- Potential exposure to risk.
ECN Accounts: Best for professional trading with transparency
ECN, or electronic communication, is a modern online trading account that provides traders direct access to interbank financial assets and major liquidity provdiers. These are the most transparent account types, as brokers cannot manipulate the difference between bid and ask price.
Generally, professional brokers are aware of market manipulation and scams in the financial market; therefore, they go for these accounts.
Pros
- Tight Spread.
- Smooth and quick order execution.
- No intermediaries.
- Great Transparency.
Cons
- High trade capital requirement.
- Limited financial instruments.
Managed Accounts: Great for passive traders with large investment
As the name suggests, a managed account is a facility for busy traders with significant capital and limited time to benefit from financial trading with the help of account managers.
Under this account type, on behalf of the investor, experienced and professional managers take place trade.
These accounts are best for diversifying investment into different financial products like forex, cryptocurrencies, stocks, and indices through experts in these markets.
Pros
- Customization features based on investors’ needs.
- Daily updation and reports of trades.
- Investors can enjoy profit with passive involvement.
Cons
- Dependency on investment managers.
- Lack of connection with trade capital.
- Account management charges.
Islamic Account: For Swap Free Trading Experience
Muslim traders comprise a significant portion of the total traders. Therefore, many brokers provide the facility of Islamic accounts or swap-free accounts. These account types are based on Shariah laws, according to which interest payment or earning is prohibited.
So, these accounts are developed based on Islamic features considering Muslim traders’ religious beliefs. As a result, traders need not roll over or swap charges for holding trades overnight. These fees are adjusted in spreads or commissions.
How to open an online trading account
The trading account opening procedure differs from broker to broker. However, let us discuss the step-by-step procedure to help you make the first move to start your trading expedition.
Broker Selection
Firstly, you must choose an ideal, reputable, and regulated broker to open an account. A trader must conduct proper research and analysis as some scam brokers are also in the financial market.
Here are a few elements you need to look for, like broker reviews on search engines, website and social media platforms, regulatory measures, spreads or commissions, experience, etc.
Determine the account type
As we have studied above, different account types are available for traders. Once you have selected the broker, it is time to select an ideal account type.
Beginners traders with small investments can go for mini accounts, and professional traders with strategies that require large capital like scalping and position trading can go for standard or ECN accounts, or if you have a significant amount of funds but do not have time for trading, you can go for managed accounts.
Registration and information submission
To open an online trading account, you must register with the broker by providing general personal and financial information.
It may include name, address, email ID, contact number, location, profession, experience, etc. In addition, your broker may ask your broker may ask for address proof or ID-related documents like a driver’s license, electricity bill, etc. You may find these formalities unnecessary, but these are essential for safe trading.
Fund your account
Once you have opened a trade account, it’s time to fund it. Many brokers open your trading account with zero minimum balance requirement, and many brokers have a limit of funds like 1000 USD for account opening.
Also, the minimum deposit amount may differ based on your account type. For ECN or standard account type, you may be required to deposit a large amount. After depositing funds, you can start placing a trade with your capital.
Wrapping Up
Well, we had an indept study of what is a trading account with its types, pros, and cons. However, the features and services of the account type may differ from broker to broker.
Also, a trader should be cautious during trade account selection as it will directly impact your trading experience. There are multiple factors to consider before selecting an ideal account type, including fees or spreads, trading strategies, leverage requirements, order executions, risk tolerance ability, experience, time frame, etc.
In addition, whichever account you go for, consider demo trading to understand its features and maximize its potential.