Series 7

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:

    • Joint Tenants with Right of Survivorship (JTWROS): Under a JTWROS account, both parties named on the account own every dime in it and each has equal rights to the property. Either owner can conduct account business on behalf of both. In the event of the death of one, the survivor automatically gets the interest of the deceased. This keeps the probate lawyers away.

    • Joint Tenants in Common (JTIC): Under JTIC, there is no right of survivorship, and the decedent's will stipulates how his interest will be passed to his heirs.

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