Post by adamsmiths on Feb 13, 2017 19:58:14 GMT 8
In foreign exchange trading, people typically assume it to be a fool-proof way of earning some quick bucks in a short amount of time. However, this is hardly ever true since methods of forex trading are really varied and some of them are extremely prone to errors. But when you decide to trade forex, you are mandated to find a broker. Brokerages can be divided into various types depending on whether they trade on behalf of their clients or simply connect their clients to the liquidity market. Market Makers or Dealing Desk brokers are brokerages which have a dealing desk which carry out trading on behalf of clients with the liquidity network. ECN or Electronic Connection Networks are completely devoid of any dealing desk and only act as conduits between the liquidity provider networks and the traders. When it comes to types of accounts, there are mainly three kinds of brokerage accounts: margin, cash and option. (Information credit: CornerTrader).
• Cash Account: Here, the client should make the payment completely and by the date of settlement, the amount which is due on any particular transaction. All securities and money in a cash account would completely be owned by the client and totally held in their name.
• Margin Account: This is one of the most popular means to enhance one’s income in the forex market. Here people borrow from their brokerages and invest in the market. Using a margin account allows the client to obtain the securities or money from the broker-dealer so that they could gain an increased amount of leverage on all the dealings in the forex market. This implies that they purchase more than triple of what they could have purchased if they had a cash account. Prior to the activation of the account, there must be a hypothecation agreement signed between the client and the broker. It should be documented with the broker-dealer that the client has been updated with and informed of every one of the risks which are associated with carrying on margin trading. A margin account should have at least two thousand dollars in the account of the brokers; and when it comes to day trading, traders who engage in day trading should have at least twenty-five thousand in an account.
• Option Account: Option account is a kind of ‘margin account’. This is used by the trader once it has been approved of by the broker-dealer for the purpose of carrying on trade. The client will be able to garner approval only if the broker-dealer has determined that the trader would maintain enough equity in the account. The client should have adequate net worth and that the client should be sophisticated and have enough financial literacy and insight to invest prudently in options trading (which is a method trading riskier than other methods). In these cases, one requires a disclosure statement which has a lot more detail.
All the points listed above are the three main types of brokerage accounts that traders are allowed to operate through and trade from.
• Cash Account: Here, the client should make the payment completely and by the date of settlement, the amount which is due on any particular transaction. All securities and money in a cash account would completely be owned by the client and totally held in their name.
• Margin Account: This is one of the most popular means to enhance one’s income in the forex market. Here people borrow from their brokerages and invest in the market. Using a margin account allows the client to obtain the securities or money from the broker-dealer so that they could gain an increased amount of leverage on all the dealings in the forex market. This implies that they purchase more than triple of what they could have purchased if they had a cash account. Prior to the activation of the account, there must be a hypothecation agreement signed between the client and the broker. It should be documented with the broker-dealer that the client has been updated with and informed of every one of the risks which are associated with carrying on margin trading. A margin account should have at least two thousand dollars in the account of the brokers; and when it comes to day trading, traders who engage in day trading should have at least twenty-five thousand in an account.
• Option Account: Option account is a kind of ‘margin account’. This is used by the trader once it has been approved of by the broker-dealer for the purpose of carrying on trade. The client will be able to garner approval only if the broker-dealer has determined that the trader would maintain enough equity in the account. The client should have adequate net worth and that the client should be sophisticated and have enough financial literacy and insight to invest prudently in options trading (which is a method trading riskier than other methods). In these cases, one requires a disclosure statement which has a lot more detail.
All the points listed above are the three main types of brokerage accounts that traders are allowed to operate through and trade from.