Forex brokers use a variety of names to describe the accounts they offer to their clients. Most of them though defer in only just a variation of some feature or a basic theme for traders. Different account types target specific trader types, so it is of significant importance for everyone to not just find a decent online trading company, but also to choose the kind of account that best suits his needs and resources.
There are several main criteria upon which forex accounts can be differentiated:
I. The Nature of Funds Used – based on that, there are two types of accounts:
- Live Account – to open a live account a client has to register with an online broker, providing his passport or identity card and a valid proof of address; some companies might require additional information and documentation. Once this is done, the account can be funded with real money and the individual can start trading financial markets. Typically, each firm has a minimum and a maximum amount of funds an account can be funded with.
- Demo Account – trading is done with virtual funds, which eliminates the potential risks that trading with real money has on your capital. Such an account is ideal for: evaluating a broker’s platform(s); checking out the company’s instrument offering and its trading terms and conditions; practising your strategy prior to implementing it in live mode.
II. Size of Initial Deposit & Minimum Trading Size
- Mini Account – allows individuals to start with a small amount of money ($50-$100). Some brokers even process subsequent deposits of as low as $10. In these accounts, clients have the chance to trade with micro lots (0.01), but the spreads are wider for most assets.
- Standard Account – the minimum deposit here could be anything between $500 and $1,000. Some brokers disallow trading in micro lots for standard account holders, which effectively increases the risk per trade for clients that have disposable funds close to the minimum requirement. Spreads are generally tighter compared to the mini accounts, which implies lower trading costs.
- VIP Account – as their name implies, VIP accounts are for those classified as VIP, or much more affluent clients. The minimum deposit requirement usually starts from $5,000. Such accounts in most cases have additional features like: much tighter spreads; a personal account manager; additional analytic tools and/or premium technical/fundamental analyses made by the company’s financial analysts; access to a business newswire service, such as Reuters or Bloomberg.
III. Managed Forex Accounts – these accounts involve external management activity. They usually require a more substantial initial investment and are suitable for clients who do not want to deal with the trading part. The most common types are:
- Individual – a personal account managed by the online broker’s team, manually or by software. Typically, the investor sets goals and transfers money into his account, which is used for the execution of trades.
- Discretionary – involves the payment of a management fee (which could be a percent of potential profits) and a dedicated professional who trades on behalf of the client. These accounts usually require a substantial initial deposit and have some restrictions on withdrawals.
- Pooled – money is deposited into a mutual fund and profits (if any) are distributed among the investors. Pooled accounts can differentiate between clients’ risk appetite, with bigger proportional trades distributed to individuals more prone to risk.
- Social Trading – social trading has been part of the industry for several years already, giving clients the chance to follow traders with a proven track record. The mechanism is easy: once the expert executes a trade, it gets transmitted and executed in the followers’ accounts, with sizes determined according to account size and personal risk preferences.
- Automated – allows access to an Application Programming Interface (API), which enables software to make trades automatically when pre-specified conditions are met. Also known as Expert Advisors (EAs), these automated trading programs are very common in MetaTrader, the most widely used retail trading platform. The former can also be utilized in a number of other proprietary forex platforms by the use of a dedicated API.