- Account type
- Registration
- Activation
- Hold on! Not so fast
If you’ve made your decision on which broker to use, now it’s time to open your account.
There are basically three steps to opening an account:
- Select your account type
- Register
- Fund your account
Account type
There are two major types of account: a personal account or a business, or corporate, account.
Some brokers might also have accounts that limit you to trading certain size lots, such as a “standard” account ($100k lots), a “mini” account ($10k) or a “micro” ($1k) account. However, most brokers nowadays allow you to trade various lot sizes. This is good because it allows new traders to start out small and gradually increase the size of their trades as they get better and get more confident.
Some brokers may offer different kind of FX trading accounts. You’ll probably want a forex spot account, not a forex futures or forwards account. (“Spot” means for immediate delivery.)
Always make sure you read the fine print! You may be giving up your right to file a grievance with the regulator, or forced to go to arbitration in case of a dispute, or find your account is governed by the laws of North Korea.
Registration
There’s a lot of paperwork involved in opening up an account. This isn’t necessarily the broker’s fault. Generally speaking, they’re just following the law.
The paperwork is required to comply with various “Know Your Client” (KYC) laws. These are laws that have been enacted world-wide to prevent money laundering and financing of terrorism. All FX brokers that are regulated – the only kind we review – will have to follow some if not all of these regulations. Most of the tiresome paperwork that you need to open an account therefore isn’t because the broker is so fussy but rather because the regulator governing it demands it. This rigmarole will be similar if not the same for all brokers regulated by that authority, so don’t blame your broker.
The KCY rules require new clients to provide government-issued Proof of Identity, such as a passport, drivers’ licence, or birth certificate. Some may require two such forms of identification. You will also need to supply some Confirmation of Residence, usually a copy of a bank statement or utility bill mailed to you in the last three months. You may be asked to upload a selfie to prove that you really are the person in the photo on your passport. (I thought this might be a problem for me because I got rid of my glasses and grew a beard since my passport photo was taken. Nonetheless it worked.)
They’ll surely require your name and address, email address, nationality, date of birth, and probably phone number. They may also ask for your employment information and some financial information, such as annual income, net worth, the source of your savings, and reason for opening an account. Some firms may ask you to fill out a questionnaire to determine your risk profile, level of financial knowledge, trading experience, investment goals, etc.
If a firm doesn’t ask you to supply a photo ID and proof of residence, don’t deal withit! Any firm like that is skating close to the law’s edge already. You don’t want to deal with a company like that, because they may well skate close to the law’s edge – or even over it – when you ask for your money back.
Money laundering laws also impose some restrictions on the flow of money in and out of your account. You can only withdraw to an account in your own name and all withdrawals of capital (not profits) have to go back to the source that they came from (e.g. if you deposited the money from a bank account it has to go back to that bank account, not an e-wallet). These are not some restrictive rules put in place by brokers to frustrate you, they’re the law in most places.
(QUESTION: Are these general rules or only the FCA?)
In short, you may think that a broker makes it a real hassle to open an account and it would be better to find one where it’s easier, but all this red tape isn’t their idea – it’s a legal requirement. Any firm that doesn’t require it is suspect and should probably be avoided.
Activation
After all the paperwork has been submitted, the broker will send you an email with the final steps. Once you’ve completed those, you should get one last email with your username, password, and instructions on how to fund the account.
Depositing money
Once your account is activated, you have to fund it by depositing money. Make sure that the costs of depositing money are spelled out clearly. How will you deposit money into your account? That may require a bank wire transfer, and that costs money. Find out ahead of time how much it costs so you aren’t surprised. Also, different brokers offer different base currencies (the currency your account is denominated in). If the base currencies they offer don’t include your home currency, you’re going to have to change your money somewhere along the line. Do you want to do that before you transfer the money or have your broker do it? Which will cost more? Remember, any money used to set up your account is money that doesn’t go to trading.
When we review a broker, we discuss the various ways you can fund your account and how much it costs.
Hold on: not so fast!
Your account is activated and funded. Time to start trading!
But wait a minute. Not so fast.
If you’re a beginner, I strongly suggest that instead of jumping right in, you take a few days or weeks – maybe even months! – to trade using the demo account first. You wouldn’t risk your life by jumping feet first into the deep end of a pool if you’d never gone swimming before. You shouldn’t risk your money by jumping feet first into the market if you’ve never traded before.
Get used to trading. Figure out what kind of strategy you want to use and how you want to trade before you start putting actual money at risk.
Once you feel comfortable and confident with the demo account, you can then start trading. But still, you should start slow. You have to learn to walk before you can run! Trading with real money is surprisingly different from trading a demo account. First off, the prices that the broker offers may be different, especially if it’s a market-maker. But more importantly, you’re different when you have real money at risk. The risk involved does things to your mental state and your body chemistry. It’s like the difference between watching a car race and being behind the steering wheel.
Summary
I’ve described here the main steps involved in opening a brokerage account. Fill in the paperwork, send the broker your credentials, get your log-in details, fund the account and get ready to trade! But before you jump in, consider trading through a demo account for some time until you feel confident. You’ve got to walk before you can run.
