Understanding different types of brokerage accounts

A cash account is the most basic account type, available at all stockbrokers. In a cash account, you need to have sufficient cash to cover the entire position when you initiate a trade. In other words, if you have $1,000 of cash on your account, you can't buy more than $1,000 worth of shares or other securities.

Having a margin account enables you to borrow money from the broker for your trades, thereby easily increasing your buying power. This can amplify your gains, but also your losses; therefore margin trading is generally only recommended for advanced traders, or for those who can afford and tolerate higher risk. For more information about these risks, read our in-depth guide to margin trading.

Margin accounts often have different conditions from cash accounts. For example, margin accounts in the US require a $2,000 minimum account balance, whereas cash accounts at many brokers do not involve a minimum deposit at all.

Are you ready to dive in? Read our comprehensive summaries on how to open a trading account and how to buy shares online.

Individual brokerage accounts

In the case of individual brokerage accounts, a single person owns all the cash and securities in the account. Individual brokerage accounts are the most standard type of account; if you're a young person who is just starting investing or trading, opening an individual brokerage account is probably the best idea for you.

Are you new to the stock market? Check out our My First Stock Trade Quest, where we guide you through, step by step, the process of opening your first online stock brokerage account and buying your first stock.

Joint brokerage accounts

A joint brokerage account means that two or more persons jointly own the account. Such joint accounts are most often owned by spouses, but there are usually no limitations - they could be relatives, friends, business partners or even complete strangers.

Depending on local regulations, there may be several types of joint accounts available, differing based on what happens when one of the owners dies. In some joint account types, the share of this person would go to (or be distributed among) the other owner(s) of the account; in other joint account types, the share of the deceased person would go to his or her estate. Enquire at the broker or consult with your tax advisor to make sure you choose the right type of joint account for your situation.

Who files taxes on a joint brokerage account? As a general rule in most countries, all owners of a joint account are liable to pay applicable capital gains or dividend taxes. Ask your tax advisor about the exact rules and procedures that may apply to you.

Corporate brokerage accounts

Corporate brokerage accounts or company brokerage accounts are owned by a legal entity, such as a business.

Brokerage accounts for minors

In most countries and US states, you need to be at least 18 years of age to be able to open a brokerage account. For anyone younger, parents (or any adult) can open a custody account and invest on the child's behalf. The child will gain control over the account and can start investing on their own upon reaching adulthood.

Custody accounts are very popular in the US and Canada (often used for investing for a child's higher education), but are less widespread in Europe.

• Tax-advantaged accounts: Many brokers, especially stockbrokers, offer tax-advantaged accounts. These allow you to invest on financial markets - usually for retirement purposes - without having to pay taxes such as capital gains or dividend taxes. Such accounts include IRA in the US or ISA in the UK.
  A regular broker account with no tax benefits would simply be called a taxable account.

• Islamic / swap-free accounts: When you trade forex, CFDs or other derivative products, you usually have to pay financing rates or swap rates for holding your position overnight. These are considered equivalent to paying interest, which is forbidden by the Islamic religion. To accommodate Muslim traders, some brokers offer accounts that charge an administration fee rather than swap rates.

Are margin accounts a good idea?

Having a margin account is only recommended for traders who are relatively experienced or can afford to take higher-than-usual risk. Margin trading can amplify your gains but also your losses, potentially leading to a rapid loss of your invested money.

What is the difference between a cash account and a brokerage account?

A cash account is a basic type of brokerage account, where you can buy stocks or other securities using the cash you have deposited in your account. It is differentiated from margin accounts, where you can borrow additional money from your broker to use for trading.

What is the difference between an individual account and a brokerage account?

An individual broker account is a type of brokerage account where the account is owned by a single person. Other types based on account ownership include joint accounts and corporate accounts.

Can you withdraw from an individual brokerage account?

Yes, it is possible to withdraw money from a regular individual brokerage account at any time. However, tax-advantaged accounts such as IRAs in the US or ISAs in the UK have limitations on when and how you can withdraw money.