Account Types – Trading Accounts Explained

Written By

Christian Harris

Written By

Christian Harris

Christian is a seasoned journalist with decades of experience. He transitioned from tech journalism to finance to follow his interest in investing. He has been trading stocks, futures, forex, and cryptocurrencies for more than 5 years, becoming an eToro Popular Investor. With hands-on expertise across various assets, he offers valuable trading insights.

» Christian Harris Profile Page

Edited By

James Barra

Edited By

James Barra

James is an investment writer with a background in financial services. He has worked as a management consultant, where he delivered large-scale operational transformational programmes at some of Europe's biggest banks. James authors, edits and fact-checks content for a series of investing websites.

» James Barra Profile Page

Updated

Mar 22, 2024

Trading accounts, and account types, can vary immensely between brokers. From cash and margin accounts to retail or professional accounts, the best choice is not always clear.

Here we explore all trading account options and their unique features and benefits, helping you find the right solution for your needs.

Quick Introduction

• Trading accounts provide access to different asset classes including stocks, forex, commodities, cryptocurrencies, or a combination.
• Fee structures vary between accounts. Compare costs associated with buying, selling, and holding positions to determine the impact on returns.
• Evaluate the level of risk associated with each account. Some accounts may offer higher leverage, amplifying gains and losses.
• Consider the features provided, such as research, charting, education, and order execution options.
• Choose a well-regulated account as this will ensure important safeguards are in place.
• Understand the specific type of account you need based on your goals, whether it’s a margin account or a specialized account for options trading.

Best Trading Accounts

We recommend these 3 accounts in 2024, they offer low entry requirements with competitive trading conditions:

#1

AvaTrade

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#2

OANDA US

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CFDs are not available to residents in the United States.

#3

Deriv.com

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Review

Forex Trading Account

A forex account is specifically tailored for trading currencies in the foreign exchange market. In this type of account, you can buy or sell one currency against another, aiming to profit from fluctuations in exchange rates.

Forex trading involves pairs of currencies, such as the Euro and US Dollar (EUR/USD), and you can take positions based on your expectations of how one currency will perform relative to the other.

These accounts are provided by forex brokers and typically offer features such as leverage, allowing you to control larger positions with a smaller amount of capital.

Forex accounts also come with various order types, including market orders and limit orders, providing flexibility in executing trading strategies.

The foreign exchange market operates 24 hours a day, five days a week, making forex accounts accessible globally.

Stock Trading Account

A stock trading account serves as a gateway for you to engage in the buying and selling of stocks.

This account grants you access to various stock exchanges, such as the New York Stock Exchange (NYSE), enabling you to trade shares of publicly listed companies.

You can employ different order types, from market orders executed at the current market price to limit orders set at specific prices, giving you control over the timing and pricing of stock transactions.

Apart from facilitating transactions, stock trading accounts offer comprehensive portfolio management tools. You can monitor your holdings, track performance, and access real-time market data through online platforms provided by the brokerage.

Additionally, these accounts may enable you to receive dividends from your stock investments and participate in corporate actions such as stock splits or mergers.

Cryptocurrency Account

These specialized accounts enable you to buy, sell, and trade various cryptocurrencies, such as Bitcoin, Ethereum, and Ripple.

These accounts are provided by crypto brokers or exchanges, offering you a platform to engage in the dynamic and decentralized world of digital assets.

These accounts often come with features such as wallet services for secure storage of digital assets, real-time market data, and order execution capabilities.

You can choose from a variety of cryptocurrency pairs, and most platforms offer advanced trading tools like chart analysis and technical indicators.

Security is a paramount consideration in cryptocurrency trading accounts, with reputable firms implementing measures such as cold storage for funds, two-factor authentication, and regular security audits to protect your assets.

Options Trading Account

An options trading account is a specialized financial account designed specifically for engaging in options trading.

Options are financial derivatives that give you the right, but not the obligation, to buy or sell an underlying asset at a predetermined price within a specified time frame.

An options trading account serves as the platform through which you can execute various options strategies, including buying and selling call or put options, engaging in complex spreads, and employing hedging techniques.

Options trading accounts come with unique features such as the ability to leverage capital through options contracts, and they often provide advanced tools and analytics to assist you in analyzing market trends and managing risk effectively.

As options trading involves a nuanced understanding of financial markets, these accounts cater to traders seeking to diversify their portfolios and take advantage of more sophisticated trading strategies.

Margin Account

This is a specialized account that allows you to borrow funds from your broker to increase your buying power in the financial markets. Cash accounts, on the other hand, are more limiting – traders can only utilize the funds deposited to the account, though they can be very useful for beginner traders as they will prevent any loss of unaffordable capital.

In a margin trading account, you essentially borrow money to purchase additional securities, such as stocks or other financial instruments, beyond what your existing cash balance would allow.

While margin trading offers the potential for enhanced returns, it also introduces increased risk, as losses can exceed the initial investment. Brokers typically require you to maintain a minimum account balance, known as the margin requirement, to cover potential losses.

Monitoring and managing margin levels is crucial to avoid a margin call, where you are required to deposit additional funds to meet margin requirements.

Christian Harris

Author

Margin trading accounts are popular among experienced traders seeking to capitalize on market opportunities with borrowed capital, but it requires a thorough understanding of risk management and market dynamics.

Cent Account

In this specialized trading account, typically seen in forex, the balance is denominated in cents instead of traditional dollars or euros. Each pip movement is valued at a smaller amount, allowing you to engage in forex markets with significantly lower capital compared to standard accounts.

Cent accounts are particularly popular among beginner traders or those looking to test trading strategies in a live market environment without risking substantial amounts of money.

These accounts serve as a stepping stone if you are seeking to develop your trading skills and gradually transition to larger trading sizes as you gain confidence and proficiency in the forex market.

Spread Betting Account

A spread betting account allows you to speculate on the price movements of various financial markets, including stocks, indices, currencies, and commodities. Unlike traditional trading where you own the underlying assets, spread betting involves betting on whether the price of an asset will rise or fall.

The profit or loss is determined by the accuracy of the prediction, and the spread, representing the difference between the buy and sell prices, serves as the primary cost of the trade.

Spread betting accounts are popular for their tax advantages in some jurisdictions, including the UK, as profits made from spread betting are often exempt from capital gains tax. Additionally, these accounts offer the flexibility to profit in both rising and falling markets.

You can go long (betting on price increases) or go short (betting on price decreases), providing a versatile approach to market speculation.

Spread betting accounts also allow for leveraged trading, amplifying both potential gains and losses, making risk management a critical consideration.

High-Frequency Trading Account

A High-Frequency Trading (HFT) account is designed for traders engaging in high-frequency trading strategies, characterized by executing a large number of orders at extremely high speeds.

HFT accounts leverage advanced algorithms and technology to capitalize on small price fluctuations in financial markets, aiming to profit from rapid and short-term market movements.

These accounts often require low-latency connections to exchanges and access to sophisticated trading infrastructure to execute orders with minimal delay.

HFT accounts cater to professional traders and institutions seeking to exploit market inefficiencies and capitalize on fleeting arbitrage opportunities. The success of HFT strategies relies on the ability to execute trades in milliseconds, and these accounts may involve automated decision-making processes based on complex algorithms.

While HFT can contribute to market liquidity, its rapid pace has sparked debates around market fairness and the potential for market manipulation.

When using a HFT account, you must have a deep understanding of market dynamics, risk management, and the technology required to operate in this fast-paced and competitive trading environment.

MAM/PAMM Account

A MAM (Multi-Account Manager) or PAMM (Percentage Allocation Management Module) account allows a professional trader or money manager to manage multiple trading accounts simultaneously.

In a MAM or PAMM structure, the manager can execute trades on behalf of multiple investors, and the profits or losses are allocated among the participating accounts based on their proportional investments.

This arrangement enables you to benefit from the expertise of a skilled trader without actively participating in the decision-making process.

These accounts provide a level of diversification and risk-sharing among investors, as the performance of the trading strategy is reflected across all connected accounts. Investors retain control over their individual accounts and can monitor the trading activity in real-time.

The MAM/PAMM model is particularly popular for investors seeking a hands-off approach to trading while leveraging the skills of a professional manager.

It also allows money managers to efficiently handle multiple client accounts and streamline the trading process.

Demo Account

A demo account is a virtual or simulated trading environment provided by brokers, allowing you to practice and familiarize yourself with the dynamics of financial markets without risking real money.

In a demo account, you are given access to a simulated balance that can be used to execute trades, test strategies, and gain hands-on experience in a risk-free setting.

Demo accounts serve as invaluable educational resources, allowing you to refine trading strategies, learn from mistakes, and develop a solid understanding of how different financial instruments behave in the ever-changing market environment.

Christian Harris

Author

While the outcomes in a demo account do not involve real money, the lessons and insights gained contribute significantly to your preparedness for actual trading.

Demo trading accounts replicate real market conditions, offering you the opportunity to explore various asset classes, practice order execution, and observe the impact of market events on their virtual portfolios.

Islamic Account

Also known as a swap-free account, this account caters to individuals adhering to Islamic finance principles, which prohibit the payment or receipt of interest (Riba).

In traditional trading accounts, overnight interest payments, known as swaps or rollover fees, are common when positions are held overnight. However, Islamic trading accounts eliminate these interest-based transactions, ensuring that trading complies with Sharia law by offering traders a swap-free alternative.

In an Islamic trading account, positions are closed by the end of the trading day to avoid interest, and any potential fees are replaced with an administration fee or a profit-sharing model. This allows Muslim traders to participate in the financial markets without compromising their religious beliefs.

These accounts often extend to various financial instruments such as forex, commodities, and indices, providing an inclusive and ethical option for traders seeking to engage in trading activities within the framework of Islamic finance principles.

VIP/Premium Account

A VIP or premium trading account is an exclusive and advanced account offered by brokers to high-net-worth individuals or active traders who meet specific criteria.

These accounts typically come with a range of premium features, personalized services, and enhanced trading conditions. VIP accounts often benefit from lower trading fees, priority customer support, access to dedicated account managers, and sometimes exclusive educational resources or market insights.

The additional perks and services provided aim to accommodate the unique needs of high-volume or experienced traders who may require more personalized attention and specialized tools to optimize their trading strategies.

While the specific offerings may vary among brokers, VIP accounts are designed to provide an elevated level of service and benefits beyond what is available in standard trading accounts.

Retail Vs Professional Account

Retail trading accounts are standard accounts, that allow you to buy and sell financial instruments such as stocks, bonds, and commodities. These accounts cater to the general public and typically come with standard features, fees, and leverage limits.

The European Securities and Markets Authority (ESMA) has imposed a variety of limits on retail traders in an attempt to reduce losses. These include leverage limits of:

• 1:30 on all major currency pairs (forex accounts)
• 1:20 on the major indices or gold
• 1:10 on all commodities excluding gold
• 1:5 on shares
• 1:2 on cryptocurrencies

These limits will only apply to trading accounts in the EEA, using a broker regulated in Europe. Popular trading regions classed as ‘Non-regulated’ by ESMA include Singapore, Australia, India and Canada – they are still well-regulated regions, just not under the ESMA jurisdiction.

Professional trading accounts, on the other hand, are specialized accounts designed for experienced and high-volume traders who meet specific eligibility criteria. These criteria may include a minimum level of trading activity, financial assets, or professional experience in the financial industry. They often offer enhanced features, lower fees, and higher leverage compared to retail accounts.

The key differences between retail and professional accounts lie in eligibility criteria, regulatory protections, and the associated features. Retail accounts are accessible to the general public with standard features and regulatory protections, while professional accounts cater to more experienced traders, offering additional benefits and potentially higher risks due to increased leverage and fewer regulatory safeguards.

Professional accounts are subject to fewer restrictions imposed on retail accounts, reflecting the assumption that professional traders possess the knowledge and experience to navigate the complexities of financial markets.

STP Vs ECN Account

STP (Straight Through Processing) and ECN (Electronic Communication Network) trading accounts are both models designed to offer you direct access to the financial markets, but they differ in their operational structures.

STP accounts streamline the trading process by allowing orders to be transmitted directly from the trader to external liquidity providers, such as banks or other financial institutions.

In an STP model, the broker acts as an intermediary, forwarding client orders to these liquidity providers. STP accounts are known for their quick order execution, minimal slippage, and the absence of a dealing desk. Brokers offering STP accounts often make their profit through a markup on the spread or by charging a fixed commission per trade.

ECN accounts, on the other hand, operate on a more decentralized and sophisticated electronic network. In an ECN model, traders can interact with each other directly within the network.

The system aggregates buy and sell orders from various participants, including banks, financial institutions, and retail traders. ECN accounts provide a more transparent marketplace, displaying real-time bid and ask prices and allowing for greater market depth.

While ECN brokers may charge a commission on trades, the pricing is often more competitive, and traders benefit from potentially tighter spreads.

Bottom Line

Different types of brokerage accounts cater to the diverse needs and preferences of traders and investors. Specialized accounts offer tailored features to meet specific trading styles, religious considerations, and preferences for direct market access.

This variety allows you to choose the best trading accounts that align with your individual goals, risk tolerance, and regulatory requirements.

FAQ

What Is A Retail Trading Account?

Retail trading accounts allow individual investors with no direct working experience of online trading to conduct trades with their own cash on a variety of equities, such as stocks, forex or options.

When it comes to the different trading accounts available to retail day traders, shopping around for the most appropriate online broker is essential. Different brokers apply varying platform charges, and these may include a fee for the use of the platform or a commission per trade.

Why Are There So Many Types Of Trading Accounts?

The diverse array of trading broker accounts caters to the varied needs and preferences of a broad range of traders, accommodating differences in trading styles, risk tolerance, and specific market access requirements.

By offering specialized accounts, brokers aim to provide a more tailored trading experience.

What Purpose Do Specialized Trading Accounts Serve?

Specialized trading accounts, such as ECN, STP, and Islamic accounts, serve the purpose of offering features tailored to specific trading styles, religious considerations, and preferences for direct market access.

This diversity allows you to choose accounts that best suit your individual requirements.

Do Different Account Types Help Risk Management?

Different trading accounts contribute to risk management by offering varying features such as leverage options, fee structures, and order execution models.

You can choose accounts that align with your risk tolerance and preferred risk-reward profiles, allowing for more effective risk management strategies tailored to your individual preferences.

Do Traders Benefit From Multiple Account Types?

You can benefit from the availability of multiple account types as it allows you to choose accounts that match your preferred trading conditions.

Whether seeking tighter spreads, specific order execution models, or adhering to religious principles, the variety of accounts ensures a more personalized and satisfying trading experience.

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