Most American brokers offer their clients three different types of accounts:
- Cash Accounts.
- Margin Accounts.
- Options Accounts.
- Cash Accounts
In a cash account you can only trade with the cash that you have deposited in the account. All securities, except for options, can be bought and sold in such an account.
In a cash account you can not sell short.
A cash account can be opened by just about anyone at any licensed broker.
- Margin Accounts
In a margin account you are not limited by the amount of money you have deposited, but rather by an agreed upon credit limit. Like a cash account, in a margin account, you can trade in all securities except options. However, here you can sell short as well.
Buying securities with a loan from a broker – buying on the margin – allows an investor to increase the size of his transactions and thereby to gain exposure to higher risk ventures. If the value of the securities in a margin account drops, the broker will require the customer to deposit more cash as a guarantee.The credit limit that the broker extends is dependent on the customer’s financial position. In order to open a margin account, the investor is required to provide information on his assets, income and the like.
- Option Accounts
In order to trade in options or other derivatives, you need to open an options account. In order to open an options account, an investor is required to sign a declaration that he is aware of the particularly high risk that accompanies investing in options.