Day Trading Broker Account Types

Cash Account

When you trade in cash account, the amount of money in the account is exactly the same as how much you deposited. When you take a trade, you have to wait T+2 (Transaction + 2 days to settle). Stocks take 2 days for transactions to settle. It’s like waiting for a check to clear. There is nothing you can do while you wait. Options trades are T+1 and take only 1 day to settle, which means you can trade with the cash the next day.

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Margin Accounts

A margin account requires a margin agreement. With a margin account trades still take T+2, but instead of requiring you to wait 2 days before you can trade with that money, the broker gives you credit to trade with the money as soon as the trade has been completed. This is what allows day traders to take 10+ trades in a single morning. We can trade the same cash 1000x times a day if we’d like. All we need is a margin account.

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Proprietary Firm Accounts

Proprietary trading firms originally were regulated trading firms. These firms will hire traders, require them to get licensed to trade (Series 6,7,63,65,66, etc), and allow them to trade with the firms own money. These firms may require traders to deposit up to $10k of their own money, but once they have passed their license, they can get 10x leverage or more. Some of the best traders could have 10mil or more in cash available to trade.

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Binary Options Accounts

Binary Options are a way of betting against a stocks price. These are highly unregulated and illegal in many countries. You make a bet that the stock will be over/under a certain price by a certain time. Instead of trading, you are simply placing bets on value of stocks.

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CFD Accounts

A Contract-For-Difference account is illegal in the United States. These are offered by international brokers and for non-US residents. When you buy a CFD, you aren’t actually buying shares of a stock. You are buying a contract to buy x number of shares of a stock. You can then sell back the contract as the price goes up. Instead of buying actual shares, you buy contracts to buy shares. The advantage is that in theory you could buy a contract to buy 1mil shares, even if there were only 100k shares available to buy at that price at the time.

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Retirement Accounts

Trading a 401k or an IRA account is fairly common. This is often where traders have already amassed a reasonable amount of capital. Many firms will allow you to trade a retirement account but there are some restrictions. 1. No Shorting 2. No Leverage 3. Margin is only for trades to settle immediately, not for trading borrowed $ 4. You cannot access the profits until retirement age, without penalty. 5. Growth is tax free, which is huge advantage

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When a trader opens a broker account they are given Margin. In addition to allow you to trade on borrowed money, they also extend a line of credit to your account for trading. Brokers in the US will always give you 4x Leverage which which means if you deposit $100k, you will have $400k in total buying power with $300k Margin being borrowed money from the broker. There are no fees for trading on Margin during the day, but holding with margin overnight is subject to interest rate fees. This is called the Margin Rate.

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Leverage Rate

The rate that your cash deposit will be multiplied to give you total buying power. All US Brokers are 4x leverage. Suretrader is 6x leverage. Prop Firms can be 10x leverage or higher. CFD accounts can offer leverage up to 50x which can quickly magnify losses.

Overnight Leverage

Most brokers reduce overnight leverage to only 2x cash balance.

Buying Power

Your buying power is your cash balance plus your margin. In the case of 4x leverage with a $100k cash balance, you have $400k in buying power. If you take a trade for $250k, you will have $150k in remaining buying power

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Margin Rate

The percentage a trader has to pay their broker in exchange for borrowing money.

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Traditional IRA

A Traditional IRA is a retirement account where individuals are allowed to direct pre-tax income which grows tax-deferred.

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Roth IRA

A Roth IRA is a retirement account funded by a taxpayer using his or her post tax-income and features tax free gains even when you withdraw.

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A 401(k) is an employer sponsored retirement plan that is eligible to employees where they can make salary reduction contributions on a pre/post-tax basis.

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Custodial Account

A custodial account is an account type that is for minors and all contributions to the account will be theirs when they turn 18.

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Joint Account

A Joint Account is a type of brokerage account shared between two or more people who include relatives, business partners and couples.

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Margin Call

Traders who are issued a margin call are in debt to their broker. The broker will require you to repay the debt and can force you to sell other assets to come up with the money.

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