What type of brokerage account can you open?
The two different types of accounts you can open are cash upfront accounts and contra accounts.
Cash upfront accounts:
Cash upfront accounts require you to deposit money before you buy any stocks and they restrict your purchases to only what you can afford. This is much safer than ‘margin’ or leveraged accounts because you will only ever be spending money that you actually have, instead of borrowing money from the broker to buy shares you can’t afford.
Contra accounts allow investors to make trades without putting any money upfront. However, some brokers may still need investors to place a deposit with them. The way it works is your brokerage will fund your trading for a 3-day period. You then have to settle the amount you owe at the end of this period. If you didn’t sell your stocks within this period, you simply owe the cost of the stocks. If you sold your stocks, there are two things that could happen. If you made a profit, you will enjoy that profit. However, if you sold the stocks at a loss, then the sale proceeds won’t be sufficient to cover the purchase cost, and you will have to cover the difference.
It is best to choose cash upfront accounts only.
|⚠ Open a cash account and not a contra account! Don’t take on debt to invest!|