A trading account can be any investment account containing securities, cash or other holdings. Most commonly, trading account refers to a day trader’s primary account. These investors tend to buy and sell assets frequently, often within the same trading session, and their accounts are subject to special regulation as a result. The assets held in a trading account are separated from others that may be part of a long-term buy and hold strategy.
Key Takeaways
- A trading account is an investment account.
- Trading accounts typically refer to accounts used to trade securities.
- Trading accounts require personal identification information and have minimum margin requirements set by FINRA.
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How a Trading Account Works
A trading account can hold securities, cash, and other investment vehicles just like any other brokerage account. The term can describe a wide range of accounts, including tax-deferred retirement accounts. In general, however, a trading account is distinguished from other investment accounts by the level of activity, purpose of that activity and the risk it involves. The activity in a trading account typically constitutes day trading.
The Financial Industry Regulatory Authority (FINRA) defines a day trade as the purchase and sale of a security within the same day in a margin account. FINRA defines pattern day traders as investors who satisfy the following two criteria:
- Traders who make at least four day trades (either buying and selling a stock or selling a stock short and closing that short position within the same day) over a five-day week.
- Traders whose day-trading activity constitutes more than 6% of their total activity during that same week.
Brokerage firms can also identify clients as pattern day traders based on previous business or another reasonable conclusion. These firms will allow clients to open cash or margin accounts, but day traders typically choose margin for the trading accounts. FINRA enforces special margin requirements for investors it considers to be pattern-day traders.
Opening a trading account requires certain minimum personal information, including your Social Security number and contact details.
Depending on the jurisdiction and business details, your brokerage firm may have other requirements as well.
FINRA Margin Requirements for Trading Accounts
Maintenance requirements for pattern day trading accounts are considerably higher than those of non-pattern trading. The base requirements of all margin investors are outlined by the Federal Reserve Board’s Regulation T.FINRA includes additional maintenance requirements for day traders in Rule 4210.
Day traders must maintain a base equity level of $25,000. The trader is permitted a purchasing power of up to four times any excess over that minimum requirement. Equity held in non-trading accounts is not eligible for this calculation. A trader who fails to meet these requirements will receive a margin call from their broker and trading will be restricted if the call is not covered within five days.
How Do I Open a Trading Account?
You can open a trading account with your brokerage or investment firm of choice by filling out an application with your personal information and funding the account. If you want margin capabilities for trading, you'll need to complete the margin agreement and submit to initial margin requirements, house margin requirements, and all applicable regulatory policies.
What Are the Disadvantages of a Trading Account?
With a trading account, you run some risks you wouldn't encounter with regular brokerage cash accounts. For instance, trading on margin increases your risk of loss because of the leverage used, and you may encounter interest charges on your margin funds as well. Plus, you risk margin calls and securities liquidation as a day trader with a margin account.
Is It Safe to Keep Money in a Trading Account?
Yes, it's generally safe to keep money in a trading account. Most reputable brokerages provide Securities Investor Protection Corp. (SIPC) insurance for up to $500,000. This doesn't protect you from investment losses, but rather from the risk of investment firm failure.
The Bottom Line
A trading account is necessary if you'd like to buy and sell securities. You can open a trading account with your brokerage of choice, but if you'd like a margin account for day trading, you'll have to meet the brokerage's margin requirements. Pattern day traders have additional requirements they must meet, including a base equity level of $25,000 as per FINRA.
