Customer Accounts - Cash and Margin Accounts
Customers can pay for security trades in full with cash or in part, on margin. A customer who trades in a cash account must pay for the full purchase price of the security by the settlement date.
Cash accounts are the most basic type of investment account. Just about anyone who is eligible to open an investment account can open a cash account.
"Margin" refers to the minimum amount of cash or marginable securities that a customer must deposit to buy securities. These accounts allow the customer to borrow part of the security's purchase price from a broker-dealer to pay for trades.
For less money than buying the securities outright, a customer who opens a margin account can invest when he or she may not have the full cash amount available. Also, a customer with marginable securities can borrow money against them up to certain limits as long as they are fully paid for. However, customers who open margin accounts must meet certain minimal financial requirements.
Under Regulation T, the Federal Reserve Board sets the minimum amount that a customer must deposit when purchasing securities on margin or selling securities short. This initial margin requirement is called Reg T and is equal to a minimum of 50% of the market value for marginable securities and 100% for non-marginable securities.
Regulation T also identifies which securities can be bought on margin, including the following:
- Stocks and bonds listed on an exchange
- Stocks quoted on the Nasdaq National Market
- Certain OTC securities
- Warrants for listed securities (with certain non-listed exceptions)
Exam Tips and Tricks
Non-eligible securities include the following:
- Certain common and preferred OTC stocks
- New Issues
- Insurance contracts
Exam Tips and Tricks
Remember that the Securities Act of 1934 gave the Federal Reserve Board the authority to regulate credit extended for securities purchases. The Fed established Regulation T to specify the equity requirements for margin transactions and the types of securities that may be purchased on marin. (Note: Mutual funds cannot be purchased on margin because they are technically considered new issues and are not marginable securities.) While the Fed established rules of credit, the SEC actually enforces these rules.
- Corporate retirement accounts
- UGMA and UTMA custodial accounts
- Keogh plans
- Tax-sheltered annuities (TSAs)
The following documentation is required before a margin account can be established:
- Credit Agreement - explains the terms under which credit is granted
- Hypothecation Agreement - gives the firm permission to pledge securities held on margin
- Loan Consent Agreement - allows the firm to loan securities held on margin to other brokers
For a quick primer on margin accounts, the following tutorial is very useful: Margin Accounts.Anti-Money Laundering Regulations
Investing BasicsFind out what to do if you have a dispute with your broker.
ProfessionalsLearn how hedge funds have gotten in trouble for illegal insider trading. Read about questionable high-frequency trading (HFT) strategies.
ProfessionalsRead an in-depth comparison about working as a Financial Analyst vs. working as an Investment Banker, two highly prestigious business careers.
ProfessionalsMost states require individuals to pass the Series 65 exam in order to act as investment advisors.
Investing BasicsMany people research restaurants or movies, but few select brokers or financial advisors with much research. Here's how BrokerCheck can help.
ProfessionalsRead an in-depth review of a career as a financial planner as opposed to a career as a stockbroker, including how to decide which is best for you.
TermA maintenance margin is the minimum amount of equity that must be kept in a margin account.
Investing BasicsBrokers and registered investment advisors have some key differences. Here's what you need to know.
ProfessionalsIt's possible that Google is looking to get into the robo-advisor business, either as a new venture or as a way to provide more benefits to employees.
ProfessionalsUpon successful completion of the Series 6, an individual will have the qualifications needed to sell open end mutual funds and variable annuities
The minimum amount of equity that must be maintained in a margin ...
A securities license entitling the holder to register as a limited ...
The Comprehensive Automated Risk Data System (CARDS) is an initiative ...
A regulatory group that reviews documentation that is submitted ...
A examination to ensure a candidate is qualified to become a ...
A person who prepares investigative reports on equity securities. ...
Alternative investment vehicles such as hedge funds offer investors a wider range of possibilities due to certain exceptions ... Read Full Answer >>
The sale of a variable annuity is regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory ... Read Full Answer >>
The exact nature of a financial advisor's job responsibilities determines whether he must have a Series 7 license. If a financial ... Read Full Answer >>
Financial advisors are not required to have university degrees. However, they are required to pass certain exams administered ... Read Full Answer >>
The term "financial advisor" can refer to a couple of different roles. It most often refers to a broker-dealer or an investment ... Read Full Answer >>
Brokers have the sole discretion to determine which customers may open margin accounts with them, although there are regulations ... Read Full Answer >>