If you want to start an option trade business, you will need a trading account together with a reliable option brokerage company or services provider. The procedure of creating an option trading account is cushy and involves simple steps. The purpose of a brokerage services provider is to offer you marketing services to help you raise the amounts you make from option trade.
After you have created and activated your account, you will be able to place options ready to be traded, and then the brokerage services provider will handle the rest. Actually, your brokerage will execute these options on your behalf. When opening an option trading account, you will be given the chance to choose either opening a margin account or a cash account. Despite the kind of your brokerage firm, you have an equal chance to open either of the above, though, depending on your choice and preference.
Now that you have to choose between two types of trade accounts, you must understand them; know the profit you can make when you open either of the accounts before you proceed to setup either account type. Here is a clear explanation of margin accounts and cash accounts.
Margin Account vs. Cash Account
The difference between a margin account and a cash account is that a cash account only allows you to use the cash available in your account to pay for options trades and all your stocks. A margin account on the other hand, allows you to utilize your current holdings, for instance long-term options and stocks as collaterals which are in turn used to borrow funds from your brokerage, and then use them as additional cash to finance additional purchases.
Usually, there is a minimum amount that must be deposited before your open trading account is activated. The amount you will be required to deposit varies from one brokerage to the other and is also different for different types of accounts. Little or at times no amount is required to activate a cash account. According to federal regulations, a margin account, on the other hand, requires at least $2000 to be activated.
After you have created an account, you must go ahead and choose the apt brokerage to use. Unlike in earlier days when you were only able to handle open trade offline, in the modern society you have a chance to choose between an online brokerage and offline brokerages. Here is a simple guide to help you choose the one that is most apt.
Offline Brokerage vs. Online Brokerage
To be successful in option trading, it is necessary that you trade using an online trading account since they are available in wider and typical options as compared to stock trade. The online ones are extra effective since they save you from the hoax involved with stock option trade. Having to send detailed messages in one trade with your broker, especially through phones, may increase chances for miscommunication and ends up being much expensive.
With the developed technology, these days’ online brokerages which are reliable for option trading offer highly intuitive interfaces for users, where it is easier to place trade options online than when doing it over the phone. Besides, online brokerages are far much convenient since they are unlike human brokerages which can only handle a single client at a time. They otherwise handle thousands of trade options simultaneously.
Having created an open trade account then chosen an appropriate brokerage, you are in a good position to trade options. Clearly, online brokerages are the most reliable and are the ones you must use if you want to get the best results.