The Purpose of Trading Accounts

Financial intermediaries operate to bridge the gap between the investing public and those institutions that are in need of financing. Trading accounts held at brokerages are a part of this process. Brokerages compete for business by offering distinct products and services that target various segments of the marketplace. Work to familiarize yourself with the characteristics of each trading account class, prior to making financial decisions.

The Securities and Exchange Commission identifies brokerages as fiduciaries that execute financial transactions on your behalf. Brokerages offer the trading accounts and infrastructure that allow you to trade investment securities. Trading account information technology provides price quotes and helps to clear trades by matching buyers and sellers of investments together. In exchange, brokerages earn commissions for processing trades through your account.

Trading accounts lower investment costs, while providing liquidity. Liquidity refers to the ease of which an asset is converted into cash. Costs are lowered, because brokerages allow you to bypass soliciting prospective investors, which would be necessary to trade securities. Further, you are not required to purchase seats, or memberships, at stock exchanges that may cost more than $1 million. Trading accounts provide access to Wall Street for smaller investors.

Trading accounts are generally categorized as either full-service or discount brokerage products. Full-service brokers, or financial advisers, provide investment recommendations to help build wealth through your trading account. Beyond trading accounts, advisers write detailed plans pertaining to your cash management, insurance, and employee benefit strategy. Full-service brokers are compensated with commissions, annual fees, or by a percentage of assets under management. Discount brokers, however, offer no advice. Discount trading accounts simply accept and execute orders. This business model is associated with online trading--where investors place trades through websites and pay minimal commissions. Discount brokerages are ideal for value-conscious savers that prefer to research their own investments.

Trading accounts provide accounting materials for financial planning and tax purposes. Online interfaces display real-time information of your account balances, alongside investment gains or losses for the day. Beyond these real-time statistics, brokerages submit monthly statements that summarize your trading account activity. Compare your investment history against a relevant benchmark to evaluate strategy. For example, the Standard and Poor’s Equity Index 500 (S&P 500) measures the performance of large-capitalization U.S. stocks, such as Bank of America and ExxonMobil. Consider hiring a financial adviser, or implementing different investment techniques, if your portfolio of larger U.S. stocks significantly underperforms the S&P 500 over the long term.

Brokerages also furnish tax statements to both your address and the Internal Revenue Service. These statements detail any capital gains and investment income that have been eared during the tax year.

All investments are subject to losses, and brokerages cannot guarantee non-cash balances held within your trading account. Further, online trading exposes you to identity theft, or phishing. Phishing occurs when criminals access your account to place unauthorized trades that increase prices for certain investments. These thieves then sell their own holdings to make a profit.