Common Types of Investment Accounts
If you are someone who has entered the world of personal investing, more likely you are aware that investments have arrays of fields from safe, conservative investments like U.S. Treasury bonds to high-risk speculative investments like startup technology stocks. There are certain types of investments and investment strategies that need various kinds of investment accounts.
Whether you only have one account or more, remember that every account you own plays a role in your financial activities and each of the account types has their features, characteristics, benefits, restrictions, or purpose that might be similar or different to other types. To give you further information, here are the common types of accounts that you might need.
Also known as a standard account or a regular account, a cash account is the main type of investment account. With this account, you can buy and sell different securities and other investment products on a cash basis. For instance, if you want to purchase a stock worth $1,000, your cash account should contain $1,000 to pay for your purchase.
When it comes to purchasing specific securities, a margin account provides you a little more leverage. This type of investment account is a loan account. With this account, your broker lets you loan a percent of the equity in your account, usually for the purpose of the buying extra marginable securities. For instance, if you want to purchase a stock worth $5,000, you could deposit $2,500 into your margin account and your broker would loan you the additional $2,500 to buy the stock. As a result, you would have $5,000 worth of stock in your margin account. Your broker then will charge you interest on the loan until you pay it back.
This type of account has options which serve as financial contracts that give the options holder the right, but not the responsibility, to buy or sell a certain security at a set price for a particular period. Trading options is an advanced, complicated strategy that is not appropriate for all investors. If you choose to trade options, you would have to open an options account.
By holding your investments in a qualified retirement account, such as a traditional or Roth individual retirement arrangement, you will be able to get considerable tax benefits. IRA accounts should either be a trust account or a custodial account, but the majority of companies that offer investment brokerage services can serve as a trustee or custodian. You cannot mix your regular funds with your qualified retirement funds, therefore, if you want to receive the tax benefits, you will need to create a separate account.
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