Account Trading Rules

Account trading rules take three forms. First, there are legal rules and regulations established by federal and state authorities that must be understood and obeyed. They exist to provide transparency and fairness in the marketplace. Second, brokers impose their own rules especially with regard to trading rules, margin requirements, and minimum account requirements. Third, individuals must impose their own trading rules and regulations before they start trading. Rules for money management, risk tolerance, and buy and sell points should be carefully tested before actual trading begins.

Federal Rule Considerations

Brokers must be licensed and report to several federal agencies, particularly the Securities and Exchange Commission which guides the regulatory scheme under which brokerage firms and banks must operate. In addition, the National Association of Security Dealers regulates the licensing of dealers and brokers. Brokerage firms do not insure investment monies but by joining SIPC, the Securities Investment Protection Corporation, brokerages pay into and meet further controls in order to offer regulatory aid for brokerage firms that might go into bankruptcy.

Exchange Rules and Regulations

Every stock bought on every exchange in the United States must represent a company that has minimum levels of net worth, shares outstanding, minimum stock price, accounting procedures, and legal status. These exchanges also tightly regulate the ways in which traders may buy and sell, and companies may issue additional shares of stock. Such procedures extend to the futures and options markets where margin requirements, investor minimum net worth requirements, and maximum commission standards are set. Exchanges are largely regulated by the Securities and Exchange Commission.

Brokerage Rules and Regulations

Brokerage firms have great leeway in determining the kind of account base they wish. Brokerage firms need not admit all kinds of accounts. Some firms do not allow individual accounts, some firms do not cater to corporate accounts. Rates charged for margin or borrowing is also left to the discretion of the broker. Day-trading limitations, including the buying and selling of stock several times in a day, are likewise imposed. Fees structures are negotiable subject to maximum amounts. Customers who desire to leverage or create a margin account have additional credit and liquidity issues that must be explained and agreed to before the account can be opened. Special rules apply to all retirement or tax-exempt accounts.

Personal Trading Rules: Money Management

No matter what broker you choose all trades are entered and completed the same way. The important rule is that investors have a plan that they have tested and have confidence that it works often enough to represent trading profits. Financial investments begins with money management and ends with disciplined trading rules. Money management is taking your entire pool of investment monies and diversifying them by asset class so that the returns are blended and not erratic or caused by a single explosive event. The difference is as simple as someone who only buys options versus the investor who buys a blend of bonds, stocks, and commodities. The other part of money management is to divide your funds so as to make many small bets in the market--say, 1% or 2% of total assets per trade. This way, many consecutive losses can be accepted without the value of the total portfolio plummeting, which would be the case if the investor trades at a rate of 10% per trade.

Personal Trading Rules: Stratgegy

The other important issue in determining account rules is whether the issuer has a plan for investing or whether he is relying on hunches and ideas. A solid investing plan involves testing and modeling how a stock will be entered, what stop loss (protective loss) should be employed, and if the stock moves profitably, what conditions will a initiate a sell signal. Investors who cannot do this should consider mutual funds or professional management. These account rules are meant for financial survival and are at least as important as every rule mentioned above that is designed to create a level playing field for all investors.

Resources

• Rules When a Broker Ceases Operations