Trading accounts, and account types can vary wildly from broker to broker. Accounts vary from cash to margin accounts, accounts for retail traders or professional traders, the best choice isn't always easy. Below, we'll explore account types, including broker-specific "VIP" and "Gold" accounts, and explain your options.
By and large, retail traders are individuals who don't have direct professional day trading experience and often rely on the knowledge and education gained from brokers' sites. Most retail traders trade with their own money and trade such assets as stocks, currencies, and stock indices.
In terms of the various trading accounts available to retail traders, researching the most suitable online broker is key. Different brokers apply different types of platform fees, which may simply be the spread between two different assets or a fixed commission or percentage per trade. In other words, the transaction costs may be built into the buy and sell spread, and are not considered fees.
Many platforms also provide ongoing asset buying tips and a helpful knowledge base that can broaden your education.
The ESMA (European Securities and Markets Authority) has imposed a series of limits on retail traders to reduce losses. These include the following leverage limits:
These limits only apply to trading accounts located in the European economic area - issued by EU regulated brokers. The most popular trading regions categorised as “unregulated” by ESMA include Singapore, Australia, India, and Canada – these regions are still well-regulated, but do not fall under ESMA’s jurisdiction.
Regular retail traders will find that different broker brands offer various incentives for frequent traders, and these are usually tied to an account "level". For example, traders who obtain Bronze, Gold or VIP status from their broker will benefit from more favourable conditions than other traders.
They'll be able to benefit from reduced rates for transactions, access to a premium server with higher speeds, or perhaps a dedicated account manager. All of these benefits can be a valuable incentive for day traders, but they still don't equal the offer of a professional trading account.
It's also possible to create a cash account or a margin account.
Spot or cash trading accounts are limited - traders can only use the funds deposited in the account. They can be very useful for novice traders, as they prevent a potential unaffordable loss of capital.
If you open a margin trading account, the broker will give you a line of credit (leverage). This can help increase potential gains, but it also means you run the risk of incurring losses that you can't afford. These types of accounts are generally more strictly regulated, with most brokers requiring a minimum investment before any margin trading takes place. It is also possible that a margin call will be made by the broker and a higher deposit will be requested to cover potential losses.
Professional trading accounts are only available to traders with proven expertise and a certain amount of investment capital, usually a minimum of €500,000. With these accounts, ESMA restrictions are removed and traders can use higher leverage for a variety of trades. However, it is important to note that there is no regulatory protection for professional traders.
It is assumed that these experienced investors are able to manage their own affairs and make choices within regulatory limits. This includes the ability to trade higher-risk products.
To remove any doubt, it should be noted that ESMA restrictions only apply within the EU, so leverage levels in non-EU and non-regulated jurisdictions are not affected. .
This is why many EU brokers decided to relocate after the ESMA introduced strict leverage rules.
Brokers offering high leverage tend to be based in offshore jurisdictions such as Belize or Vanuatu. Retail traders will find that it is advisable to start trading with maximum leverage levels of around 1:15 or 1:30 initially, to minimise potential losses.
As we've already indicated, turning to brokers based in places that are not affected by EU legislation is a way to avoid the ESMA's leverage requirements. It must be recognised, though, that these regulations were put in place to protect retail traders and to reduce financial risk. Traders should absolutely not be tempted to turn to unregulated brokers to avoid leverage rules, as this is not safe and there are better options.
One of these options is to check if your current broker already has offshore or non-EU affiliate brands. Many brokers have other regulated brands under their "umbrella", so transferring your account to a non-EU or offshore jurisdiction is entirely possible. Just contact your broker to find out more about the other brands they operate in acceptable locations.
Moreover, retail traders looking for a way to avoid ESMA bans could seek to gain professional trader status. Not all regular traders will have this ability, and the downside of becoming a "professional trader" is that there is no regulatory protection in place.
Professional traders will need to have at least 1 year of trading experience in a relevant financial role and a minimum level of funds available, usually around £500,000 but which can be spread across multiple accounts. Obtaining pro trader status allows you to benefit from greater leverage on forex and CFDs.
Other types of trading accounts include PAMM accounts and micro trading accounts.
PAMM accounts are used for forex trading and are a great solution for investors who don't have time to trade. These accounts use a shared pool of money for trading in the forex market. Trades are made by experienced traders and investors can usually choose any trader they want to manage their capital.
PAMM is an acronym for "Percentage Allocation Module Management". This model distributes transaction size based on allocation percentage.
A MAM account does something similar, but allows the fund manager to manage multiple trading accounts.
Micro trading accounts refer to smaller-sized CFDs and forex trades. They are a good way to start forex trading for those who don't have a lot of time to trade. The smaller lot sizes and margin requirements make them appealing to those who are new to trading.
We have a full article on demo accounts, which are an ideal starting point for most traders. Most brokers offer free demo accounts, so you can try a few before settling on one broker's real account..
Managed accounts can be risky. Entrusting the responsibility of trading to someone else has many dangers. If this person is also employed by the broker, there is also a conflict of interest. Beware of false promises or guarantees of easy wealth.
PAMM and MAM accounts are less risky because they are more strictly regulated and the conflict of interest is removed because brokers make money based on volume here, rather than on lost trades.
Some high level accounts, like VIP accounts, may involve an account manager, but this isn't the same as a managed account.
In general, though, it's best to take responsibility for your own trading.
An ECN account gives you, as a trader, direct access to the markets, without going through a market maker (as most brokers do). This usually means tighter spreads, but also more complex trading platforms.
A DMA account is very similar to an ECN account. As the name suggests, you get direct market access - but ECN trades are placed directly in the market through an anonymous network, whereas DMA accounts have contracts with a specific liquidity provider.