Which type of account would NOT be ideal for an active trader?

Which type of account would NOT be ideal for an active trader?

• A. Fee-based account
• B. Margin account
• C. Cash account
• D. Commission-based account

Answer: (C)

A cash account would not be ideal for an active trader because it requires that all purchases be paid for in full by the end of the settlement period. This limitation restricts the ability to quickly reinvest funds or leverage positions, which is often a key strategy for active traders who seek to capitalize on short-term market fluctuations. Active traders typically benefit from more flexibility and quicker transaction capabilities, characteristics that are more aligned with other account types such as margin or fee-based accounts. In a margin account, for instance, traders can borrow funds to purchase securities and have the potential to amplify their returns, while a fee-based account can provide a more cost-effective structure for those trading frequently, as it may charge a flat fee rather than a commission per trade. A commission-based account allows for numerous transactions without significant hindrance, but not paying for each transaction in full at the time of trading, unlike in a cash account, enables active traders to operate more efficiently. Thus, the cash account's restrictions make it less favorable for active trading strategies.

A cash account would not be ideal for an active trader because it requires that all purchases be paid for in full by the end of the settlement period. This limitation restricts the ability to quickly reinvest funds or leverage positions, which is often a key strategy for active traders who seek to capitalize on short-term market fluctuations. Active traders typically benefit from more flexibility and quicker transaction capabilities, characteristics that are more aligned with other account types such as margin or fee-based accounts.

In a margin account, for instance, traders can borrow funds to purchase securities and have the potential to amplify their returns, while a fee-based account can provide a more cost-effective structure for those trading frequently, as it may charge a flat fee rather than a commission per trade. A commission-based account allows for numerous transactions without significant hindrance, but not paying for each transaction in full at the time of trading, unlike in a cash account, enables active traders to operate more efficiently. Thus, the cash account's restrictions make it less favorable for active trading strategies.