Mutual Fund 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
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 Accounts
"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.

Regulation T
Under Regulation T, the Federal Reserve Board sets the minimum amount a customer must deposit when purchasing securities on margin or selling securities short. This initial margin requirement is called Regulation 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
Note that U.S. Treasury bills, notes and bonds, government agency securities, nonconvertible corporate debt, and municipal securities are EXEMPT from Regulation T.

Non-eligible securities include the following:

  • Options
  • Certain common and preferred OTC stocks
  • Rights
  • 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 margin. (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.

Margin accounts may not be opened for the following types of accounts:

  • IRAs
  • 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 Margin Trading tutorial is very useful.

Related Articles
  1. Investing Basics

    3 Business Tips from Restaurant Reality Shows

    The reality TV shows "Restaurant Impossible" and "Kitchen Disasters" offer lessons not just for restaurateurs, but for all business owners.
  2. Investing News

    Silicon Valley Startups Fly into Space

    Space enthusiasts are in for an exciting time as Silicon Valley startups take on the lucrative but expensive final frontier.
  3. Personal Finance

    How Tech Can Help with 3 Behavioral Finance Biases

    Even if you’re a finance or statistics expert, you’re not immune to common decision-making mistakes that can negatively impact your finances.
  4. Economics

    Long-Term Investing Impact of the Paris Attacks

    We share some insights on how the recent terrorist attacks in Paris could impact the economy and markets going forward.
  5. Credit & Loans

    HARP Loan Program: Help for Underwater Mortgages

    If you are underwater on your mortgage, this program may be just what you need to help build up equity in your home.
  6. Taxes

    How & Where to File Form 1040 (And Which Version)

    All taxpayers need to know three things when filing a 1040: which form to use, how to file and where to file. After reading this, you'll know all three.
  7. Stock Analysis

    An Introduction To The Indian Stock Market

    Most trading in the Indian stock market occurs through its two exchanges – the Bombay Stock Exchange and the National Stock Exchange.
  8. Retirement

    Should Social Security Be Privatized?

    The idea of controlling your own retirement money is one that continues to hold appeal for a large segment of voters.
  9. Savings

    How Americans Can Open a Bank Account In Thailand

    Have your paperwork in order and be sure to shop around.
  10. Savings

    Should You Look at 529 Plans Outside Your State?

    529 savings plans are not restricted by geography. So if your in-state offering has high fees or poor investment choices, look elsewhere.
  1. Elastic

    A situation in which the supply and demand for a good or service ...
  2. Earnings Stripping

    Earnings Stripping is a commonly-used tactic by multinationals ...
  3. Skinny Down Distribution

    Skinny down distribution is corporate practice of slimming down ...
  4. Education Loan

    Money borrowed to finance education or school related expenses. ...
  5. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, ...
  6. Student Loan Forgiveness

    Under certain circumstances, federally backed student loans – ...
  1. Are catch-up contributions included in the 415 limit?

    Unlike regular employee deferrals, catch-up contributions are not included in the 415 limit. While there is an annual limit ... Read Full Answer >>
  2. Can catch-up contributions be matched?

    Depending on the terms of your plan, catch-up contributions you make to 401(k)s or other qualified retirement savings plans ... Read Full Answer >>
  3. Is Australia a developed country?

    Australia is one of the most developed countries in the world. The nation's per capita gross domestic product (GDP), one ... Read Full Answer >>
  4. Is Nigeria a developed country?

    Nigeria is not a developed country by any reasonable standard. The country's per capita gross domestic product (GDP) is much ... Read Full Answer >>
  5. Are catch-up contributions included in actual deferral percentage (ADP) testing?

    Though the Internal Revenue Service (IRS) carefully scrutinizes the contributions of highly compensated employees (HCEs) ... Read Full Answer >>
  6. Who offers 401(k) plans?

    401(k) plans are one of the most common retirement plans available. A 401(k) plan must be offered by a business. These plans ... Read Full Answer >>
Hot Definitions
  1. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  2. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  3. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  4. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  5. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
  6. Indemnity

    Indemnity is compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability ...
Trading Center