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As you shop for a brokerage, take note of the financial strength of your broker and the extent of its SIPC coverage. This is the insurance that compensates investors if their stock brokerage firm goes bankrupt. Different types of assets have different levels of coverage, and some—like commodities—have no coverage at all.
You can trade more than a dozen types of investment products within a brokerage account. Some brokerage accounts will also allow you to hold membership units in a limited liability company or limited partnership units in a limited partnership. These products are typically tied to investing in a hedge fund , so it may be difficult for new investors or less-wealthy individuals to access these options. While brokerage accounts have fewer special rules than retirement accounts, there are a few different kinds of brokerage accounts.
When you're shopping for a brokerage account, pay attention to whether the account falls into one of the following categories. A discount brokerage account, or discount broker, is the most common form of brokerage account for casual investors who are just starting out. It may be an online-only brokerage, or there may be a few branch offices around the country.
Everything is pretty much do-it-yourself and you have to execute your own trades. As a result, you save on fees. A full-service brokerage account is a brokerage account that pairs you with a dedicated broker who knows you, your family, and your financial situation.
You can pick up the phone and speak to them, or walk into their office and regularly have meetings to discuss your portfolio. In exchange for that personalized service, you'll pay higher fees. These fees may be bundled into your commission fees, or they may be charged to your account in some other form.
A cash brokerage account is one that requires you to deposit cash before you can start trading. In other words, the brokerage won't lend you any money, and you can't spend what you don't have.
This limits traders to basic trades—they can't short a stock, for instance. Cash accounts can be either discount or full-service accounts. A margin account , as opposed to a cash account, allows you to borrow money to make trades. The broker essentially doubles as a lender, giving you what amounts to low-interest loans for the specific purpose of making trades. As with cash accounts, margin accounts can be either discount or full-service brokerage accounts. While borrowing money to make trades enhances your potential gains, it also adds to your risk.
Only experienced traders should consider using a margin account. Financial Industry Regulatory Authority. Securities Investor Protection Corporation.
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