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.

Introduction


Related Articles
  1. Options & Futures

    Margin Trading: Conclusion

    Here's the bottom line on margin trading: You are more likely to lose lots of money (or make lots of money) when you invest on margin. Now let's recap other key points in this tutorial: ...
  2. Active Trading Fundamentals

    Explaining Initial Margin

    Initial margin is the percentage of a stock’s price an investor must have in his account to buy that stock on margin.
  3. Markets

    Intermediate Guide To E-Mini Futures Contracts - Margin

    Margin is essentially a loan that a brokerage firm extends to a client (the trader or investor) that is used for the purchase of trading instruments. Margin trading allows traders and investors ...
  4. Term

    Understanding the Maintenance Margin

    A maintenance margin is the minimum amount of equity that must be kept in a margin account.
  5. Options & Futures

    Margin Trading: The Dreaded Margin Call

    In the previous section, we discussed the two restrictions imposed on the amount you can borrow. First, the initial margin, which is the initial amount you can borrow. Second, the maintenance ...
  6. Investing Basics

    Understanding Regulation T

    Regulation T governs customer cash accounts and the amount of credit that brokerage firms and dealers may extend to customers to buy securities.
  7. Active Trading Fundamentals

    Introduction to Margin Accounts

    Find out what your broker is doing with your securities when you invest on margin.
  8. Active Trading Fundamentals

    Beginner Trading Fundamentals: Leverage And Margin

    Two concepts that are important to traders are margin and leverage. Margin is a loan extended by your broker that allows you to leverage the funds and securities in your account to enter larger ...
  9. Options & Futures

    The Advantages Of SPAN Margin

    Find out how it provides futures and commodity option strategists with more bang for their margin buck!
  10. Insurance

    Futures Fundamentals: Characteristics

    In the futures market, margin has a definition distinct from its definition in the stock market, where margin is the use of borrowed money to purchase securities. In the futures market, margin ...
RELATED TERMS
  1. Initial Margin

    The percentage of the purchase price of securities (that can ...
  2. Buying On Margin

    The purchase of an asset by paying the margin and borrowing the ...
  3. Marginable

    Definition of "marginable."
  4. Option Margin

    The cash or securities an investor must deposit in his account ...
  5. Margin Call

    A broker's demand on an investor using margin to deposit additional ...
  6. Credit Balance

    In a margin account, the amount of funds deposited in the customer's ...
RELATED FAQS
  1. How does a broker decide which customers are eligible to open a margin account?

    Learn how brokers have the sole discretion to determine which customers can open margin accounts, and understand the rules ... Read Answer >>
  2. How much can I borrow with a margin account?

    Understand the basics of margin accounts and buying on margin, including what amount investors can typically borrow for purchases ... Read Answer >>
  3. How exactly does buying on margin work and why is it controversial?

    Learn how purchasing stock on margin works, and understand the risk associated with margin accounts that make the strategy ... Read Answer >>
  4. What is the interest rate offered on a typical margin account?

    Learn about the basics of trading on margin accounts, specifically the rate of interest that is typically charged for margin ... Read Answer >>
  5. What does it mean when the shares in my account have been liquidated?

    An account liquidation occurs when the holdings of an account are sold off by the firm in which the account was created. ... Read Answer >>
  6. Why do you need a margin account to short sell stocks?

    The reason that margin accounts and only margin accounts can be used to short sell stocks has to do with Regulation T, a ... Read Answer >>
Hot Definitions
  1. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  2. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  3. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  4. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  5. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  6. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
Trading Center