Types of brokerage accounts

There are a number of different accounts you can open at a brokerage house. Margin account and an option account are the most common types. Each of these accounts are evaluated by the brokerage house and represent different levels of credit you may receive as the account holder.

A traditional brokerage account is a cash account also referred to as a "Type 1" account. This account requires that you pay in full for all purchases by the settlement date in order to make trades. If the account does not have sufficient cash already in place you must add cash to pay for purchases. In the past, brokerage houses would often accept an order to buy stock in a cash account and after executing that order, they would allow you to bring the money to settle the trade a few days later. Now with electronic trading, most brokers require good funds in the account before they will accept an order to buy. Some brokerage houses may require a deposit as much as $10,000, but outside of that there are few restrictions on who may open a cash account.

A margin account is a type of brokerage account that allows you to take out loans against securities you own and is sometimes referred to as a "Type 2" account. If this case the brokerage house is extending you credit and there is a screening procedure to obtain a margin account. All short sales are required to take place in a margin account.

An option account is a type of brokerage account that allows you to trade stock options such as puts and calls. Because of the risks associated with these types of transactions, the brokerage will require you to sign a statement acknowledging such. The broker does this to provide themselves with protection as some brokers were successfully sued by clients who experienced large losses in options and then claimed they were unaware of the risks. Otherwise an option account is identical to a margin account.