There are three main types of brokerage accounts: cash accounts, discretionary accounts, and margin accounts.

Cash accounts: Cash accounts require you to leave money with the broker; this money is used to pay for purchases and to generate more money from the selling of securities. In trading, a specific amount of time is allowed between the notification of purchase and the deadline for payment. Therefore, having a cash account with a broker is a good idea in many cases because this account ensures that cash will be available for immediate payment upon the receipt of securities.

Discretionary accounts: Discretionary accounts are accounts in which a broker or investment advisor is authorized to make trades for you. Exercise caution in using this type of account; the broker can buy and sell securities at will, but you are responsible for paying all taxes and commission costs. Before you set up a discretionary account, make sure the broker has thoroughly read and understands your investment plan and your list of investment goals. I generally recommend using extreme caution with this type of account.

Margin accounts: Margin accounts allow you to borrow money from the brokerage firm to purchase financial assets. Since this type of account involves debt, it amplifies both gains and losses (see Section 19: Investments 2: Creating a Personal Investment Plan on this website for more detail). Because the broker assumes a greater amount of risk with margin accounts, the broker requires you to maintain a specific maintenance margin in your account at all times; in other words, you must maintain a specific percentage of the value of the assets that have been purchased on margin. Currently, the maintenance margin is 50 percent. Should the value of the securities purchased on margin decline below this percentage, you will get a “margin call.” A margin call requires you to either put more money in your margin account or sell some of the assets you have purchased on margin to reduce the amount of money you owe. Rules for margin lending are federally regulated. I strongly suggest that you do not buy on margin because you have the potential to lose more than the amount of your original investment. Buying on margin is a high-risk activity.