Most investors open a trading account to buy or sell stocks, bonds and other securities, with the ultimate purpose of turning a profit. Managers in a brokerage firm or financial service administer trading accounts. The purpose of an account could focus on day or short-term trading on the stock market, buying and holding long-term stocks, or handling investments for retirement savings.
The purpose of using a trading account depends on your goals at a particular time in your life. Let’s say you just start investing in your 20s. You can take more chances at this stage in your life because you have many years of investing ahead. So you might become an aggressive investor with short-term investing or day trading in stocks. The stock market can become volatile in uncertain situations, such when there is news of sudden changes in the economy. This creates quick up and down swings in prices. When you trade daily, or on a regular basis, you can profit from this volatility by trading stocks that show sharp short-term price gains. But the opposite can happen, too. When a stock takes a sharp downward turn, you might lose a lot of money. Short-term trading can last up to a few months or a year. You might make quick gains in a stock with a track record of excellent performance and minimal risk, but still face losses if conditions negatively affect the overall market. In some cases the stock might not bounce back for years.
If you want to avoid the stress or worry of checking your investments daily or regularly, long-term investments focus on building wealth over a period of years. Prices on investments can rise and fall, but usually make gains over the long term when your portfolio is well balanced. Many long-term traders take advantage of mutual funds with diversified stocks and bonds that cover a wide range of industries and sectors. For example, when you consider investing for retirement, you open a trading account that has long-term investments as the purpose. The portfolio might include a variety of stocks, bonds, mutual funds and cash equivalents such as money market funds. Some stocks might carry higher risk than others. But most long-term investments focus on safer low- to moderate-risk products for steady growth. You can have several trading accounts that handle various types of investments, such as day trading, longer-term stocks and retirement accounts.
Your goals for a trading account change through the years. As a young investor, you have the time to make up for losses. For example, bonds usually have more security and less risk than stocks. In your 20s, you might have 70 percent invested in stocks with 30 percent in bonds. In your 40s, that can change to 60 percent in stocks and 40 percent in bonds. As you near retirement, or enter your retirement years, you might switch to 70 percent in bonds and 30 percent in stocks for more security.
Your purpose in a trading account depends on your knowledge as well as your age. A broker or financial adviser can assist you in investments initially. But you’ll begin to do more on your own as you learn about investment basics such as stock analysis, finding reliable resources for investing, and understanding how dividends work or how corporate and economic changes affect the market. Discount online trading accounts let you make your own trades instantly, no matter your goals.
- Goodshoot/Goodshoot/Getty Images