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. Brokers

    Broker-Dealer Industry 101: The Landscape

    Independent broker-dealers are a great choice for experienced, self-starter planners who have established practices.
  2. Personal Finance

    RIAs and Brokers: What's the Difference?

    RIAs and brokers are held to different standards when providing investment advice. Here's how they differ.
  3. Trading Systems & Software

    Steps to Starting Up an Independent Broker Dealer

    Launching your own broker-dealer is a lot of work, but the potential payoff is great, both personally and financially.
  4. Professionals

    How To Answer Option Questions On The Series 7 Exam

    Learn how to answer option questions on the Series 7 exam. Pass your Series 7 exam with the help of these tips.
  5. Professionals

    Series 55

    FINRA Series 55 Exam Guide
  6. Professionals

    Series 62

    FINRA Series 62 Exam Guide
  7. Professionals

    Series 99

    FINRA/NASAA Series 99 Exam Guide
  8. Professionals

    Series 65

    FINRA/NASAA Series 65 Exam Guide
  9. Professionals

    Series 6

    FINRA Series 6 Exam Guide
  10. Professionals

    Series 66

    FINRA/NASAA Series 66 Exam Guide
RELATED TERMS
  1. No results found.
RELATED FAQS
  1. What are the differences between the Series 6 exam and the Series 7 exam?

    The Financial Industry Regulatory Authority (FINRA) offers a variety of licenses that must be obtained before conducting ... Read Full Answer >>
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!