Account Types
Understanding different brokerage account types is essential for the SIE exam. Each account type has specific characteristics, requirements, and appropriate uses.
Cash Accounts vs. Margin Accounts
The two fundamental account types are governed by Regulation T of the Federal Reserve Board.
Cash Accounts
In a cash account, the customer pays 100% of the purchase price for securities.
| Feature | Cash Account |
|---|---|
| Payment Required | 100% of purchase price |
| Borrowing | Not permitted |
| Short Selling | Not permitted |
| Interest Charges | None |
| Risk Level | Limited to investment amount |
Key Cash Account Rules
- Securities must be fully paid before sale (no free-riding)
- Fully paid securities are segregated and held for the customer
- Cannot engage in strategies with unlimited loss potential
- Simplest account type with lowest risk
Free-Riding Violation: Selling securities before paying for them in a cash account is prohibited.
Margin Accounts
In a margin account, customers can borrow money from the broker to purchase securities.
| Feature | Margin Account |
|---|---|
| Initial Payment | 50% minimum (Reg T) |
| Borrowing | Up to 50% of purchase price |
| Short Selling | Permitted |
| Interest Charges | On borrowed funds |
| Risk Level | Can exceed investment (leverage) |
Margin Requirements
| Requirement | Amount | Rule |
|---|---|---|
| Initial Margin | 50% | Regulation T |
| Minimum to Open | $2,000 or 100% (whichever less) | FINRA |
| Maintenance Margin (Long) | 25% minimum | FINRA Rule 4210 |
| Maintenance Margin (Short) | 30% minimum | FINRA Rule 4210 |
Margin Example
Buying $10,000 of stock on margin:
| Amount | |
|---|---|
| Purchase Price | $10,000 |
| Customer Pays (50%) | $5,000 |
| Broker Loans (50%) | $5,000 |
| Interest Charged On | $5,000 |
Leverage Effect
| Scenario | Cash Account | Margin Account |
|---|---|---|
| Stock rises 20% | +20% return | +40% return |
| Stock falls 20% | -20% return | -40% return |
Warning: Leverage amplifies both gains AND losses. Margin accounts carry significantly higher risk.
Margin Calls
When equity falls below maintenance requirements, a margin call is issued:
- Customer must deposit additional funds or securities
- If not met, broker may sell securities without notice
- Broker has the right to choose which securities to sell
Joint Accounts
Joint accounts have two or more owners. Two main types exist:
Joint Tenants with Rights of Survivorship (JTWROS)
| Feature | JTWROS |
|---|---|
| Ownership | Equal among all owners |
| Death of Owner | Assets pass to surviving owner(s) |
| Probate | Avoided |
| Common Use | Spouses |
Tenants in Common (TIC)
| Feature | TIC |
|---|---|
| Ownership | Can be unequal (specified percentages) |
| Death of Owner | Deceased's share goes to their estate |
| Probate | Required for deceased's share |
| Common Use | Business partners, relatives |
Joint Account Rules
Both types share these characteristics while all owners are alive:
- Any owner can trade without others' permission
- Any owner can deposit funds
- Any owner can request information
- Checks must be made payable to all owners
Key Difference: JTWROS passes assets to survivors; TIC passes to the deceased's estate.
Individual Accounts
Individual accounts have a single owner with full control:
- One person owns and controls the account
- Can grant trading authority to others (POA)
- Assets pass to estate upon death
Custodial Accounts (UGMA/UTMA)
Custodial accounts hold assets for minors under:
- UGMA - Uniform Gifts to Minors Act
- UTMA - Uniform Transfers to Minors Act
| Feature | UGMA/UTMA |
|---|---|
| Beneficial Owner | The minor |
| Control | Custodian (adult) |
| Transfers at | Age of majority (18-21, varies by state) |
| Tax Reporting | Minor's SSN |
| Margin Trading | Not permitted |
Key Custodial Account Rules
- One custodian, one minor per account
- Gifts are irrevocable (cannot be taken back)
- Custodian manages for minor's benefit
- Assets transfer to minor at majority
- Cannot use margin or engage in speculative strategies
Corporate and Institutional Accounts
Corporate accounts require additional documentation:
| Required Document | Purpose |
|---|---|
| Corporate Resolution | Authorizes account opening |
| Articles of Incorporation | Proves existence |
| List of Authorized Traders | Who can trade |
| Tax ID (EIN) | For tax reporting |
Institutional Account Definition
An institutional account (per FINRA rules) is:
- Bank, savings institution, insurance company
- Registered investment company
- Registered investment adviser
- Entity with $50 million+ in assets
Trust Accounts
Trust accounts hold assets for beneficiaries according to trust terms:
| Component | Description |
|---|---|
| Grantor | Creates the trust |
| Trustee | Manages assets per trust terms |
| Beneficiary | Receives benefits |
| Trust Document | Legal terms and instructions |
Types include:
- Revocable Living Trust - Can be modified
- Irrevocable Trust - Cannot be changed
- Testamentary Trust - Created by will
Fiduciary Accounts
Fiduciary accounts are managed by someone other than the owner:
| Type | Fiduciary |
|---|---|
| Trust | Trustee |
| Estate | Executor/Administrator |
| Custodial | Custodian |
| Conservatorship | Conservator |
Fiduciary Duty: The fiduciary must act in the best interest of the beneficial owner.
Summary: Account Type Comparison
| Account Type | Owners | Key Feature |
|---|---|---|
| Cash | 1+ | Full payment required |
| Margin | 1+ | Borrowing permitted |
| JTWROS | 2+ | Survivorship rights |
| TIC | 2+ | Specified ownership |
| UGMA/UTMA | Minor (custodian controls) | Irrevocable gift |
| Corporate | Entity | Resolution required |
| Trust | Per terms | Trustee manages |
Under Regulation T, what is the minimum initial margin requirement for purchasing securities in a margin account?
In a Joint Tenants with Rights of Survivorship (JTWROS) account, what happens to the assets when one owner dies?
Which of the following is TRUE about UGMA/UTMA custodial accounts?
3.5 Account Registration
Continue learning