Customer Accounts - Types of Brokerage Accounts

There are three types of brokerage accounts: cash, margin and option.

  • In a cash account, the client must pay, in full and by the settlement date, the amount due on any transaction. All money and securities in a cash account are wholly owned by the client and entirely held in her name.

  • A margin account allows the client to borrow money or securities from the broker-dealer in order to gain greater leverage on her transactions - that is, to buy as much as double what she could with a cash account. Before the account is activated, the client must sign a hypothecation agreement, which will be discussed soon. The broker-dealer must document that the client has been informed of all risks associated with trading on margin. A margin account must have at least $2,000 in invested capital; a day trader's margin account must have at least $25,000.

  • An option account is a margin account approved by the broker-dealer for trading on the CBOE. The client will get such approval only if the broker-dealer determines that there is adequate equity in the account, that the client has adequate net worth and that the client is sophisticated enough to invest prudently in the riskier realm of options trading. A more detailed risk disclosure statement is required.

Customer Account Ownership
There are several arrangements for ownership of a customer account, and these are the two most important:

  1. Individual: A simple account with the name of one, and only one, real person attached.

  2. Joint: Typically used by people who are married or cohabiting. Joint accounts are almost always for two people who are residing together. However, this is a matter of social convention rather than law, and it is not inconceivable to have joint accounts with more than two names attached. There are two flavors here:

    • In a cash account, the client must pay, in full and by the settlement date, the amount due on any transaction. All money and securities in a cash account are wholly owned by the client and entirely held in her name.

    • A margin account allows the client to borrow money or securities from the broker-dealer in order to gain greater leverage on her transactions - that is, to buy as much as double what she could with a cash account. Before the account is activated, the client must sign a hypothecation agreement, which will be discussed soon. The broker-dealer must document that the client has been informed of all risks associated with trading on margin. A margin account must have at least $2,000 in invested capital; a day trader's margin account must have at least $25,000.

    • An option account is a margin account approved by the broker-dealer for trading on the CBOE. The client will get such approval only if the broker-dealer determines that there is adequate equity in the account, that the client has adequate net worth and that the client is sophisticated enough to invest prudently in the riskier realm of options trading. A more detailed risk disclosure statement is required.
Other Types of Accounts


Related Articles
  1. Professionals

    TYPES OF ACCOUNTS

    Individual Account An individual account is an account that is owned by one person. That person makes the determination as to what securities are purchased and sold. In addition, that person ...
  2. Professionals

    Account Types

    NASAA Series 65: Section 17 Account Types. In this section types of brokerage accounts and commissions.
  3. Professionals

    Types Of Accounts

    Individual Account An individual account is an account that is owned by one person. That person makes the determination as to what securities are purchased and sold. In addition, that person ...
  4. Professionals

    Opening a Brokerage Account

    Opening a Brokerage Account
  5. Professionals

    B. Types of Accounts

    Mailing Instructions All confirmations and statements will be sent to the customer’s address of record. Statements and confirmations may be sent to an individual with power of attorney ...
  6. Options & Futures

    Pick the Right Brokerage Account for Options Trading

    Follow these steps to pick the right options brokerage account depending on your trading needs and style of trading.
  7. Professionals

    Margin Accounts

    Margin Accounts
  8. Professionals

    Compliance and Custody of Client Funds

    FINRA/NASAA Series 63: Section 4 Compliance and Custody of Client Funds. In this section margin account, customer complaints, custody of client funds and discretionary accounts.
  9. Professionals

    Death or Incompetence of the Account Owner

    FINRA Series 6: Section 12 Death or Incompetence of the Account Owner. This section deals with the treatment of Individual, Joint, Partnership, Custodial and Trust Accounts in case of death or ...
  10. Professionals

    WRAP Accounts

    FINRA/NASAA Series 66 Section 1 - WRAP Accounts. Programs that meet the requirements, in this section, do not have to register as investment companies.
RELATED TERMS
  1. Joint Tenants in Common - JTIC

    A type of brokerage account which is owned by at least two people ...
  2. Joint Tenants with Right of Survivorship ...

    A type of brokerage account which is owned by at least two people, ...
  3. Joint Account

    A bank or brokerage account that is shared between two or more ...
  4. Special Memorandum Account - SMA

    A special account where excess margin generated from a client's ...
  5. Call Loan Rate

    The short term interest rate charged by banks on loans extended ...
  6. Principal Orders

    A type of order carried out by a broker-dealer which involves ...
RELATED FAQS
  1. 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 >>
  2. What's the difference between a cash account and a margin account?

    Compare and contrast margin and cash accounts. Margin accounts offer short-term loans, leverage on existing portfolios, and ... 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. 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 >>
  5. What does it mean when I get a maintenance margin call?

    Understand how maintenance margin calls work, and learn about how margin requirements are different for trading stock versus ... Read Answer >>
  6. Under the Uniform Securities Act, client information may not be disclosed to a third ...

    The correct answer is c. No authorization is needed from the client’s wife since it is a joint account. Also none is needed ... Read Answer >>
Hot Definitions
  1. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  2. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  3. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  4. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  5. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  6. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
Trading Center