CHAPTER 11 - ACCOUNT FEATURES Flashcards
(27 cards)
Cash Trading vs Margin Trading
Cash trading the investor pays for entire trade by settlement
Margin the investor borrows part of the investment
Cash Accounts
Anyone can open a cash account
Payment is required in full and is expected by end of day on the settlement day (T+1) - Regular way settlement (next business day)
Regular Way vs Regulation T Settlement
Regular Way is T+1 or next business day (enforced by FINRA)
Regulation T is T+3 (S+2) or 3 business days (federal reserve)
MOST do regular way
Accounts that MUST be cash
IRAs and other retirement accounts
Custodial accounts (UTMAs)
Margin Accounts
Can trade larger positions than you would normally be able to
Borrow cash or securities through BD
Long and short margin accounts
Long - borrow cash to buy (pay interest on loan)
Short - borrow stock to sell
Using margin is called leverage
Pros and Cons of margin
Pros
Buy more securities with less cash
Leverage investment
Leveraged investment can increase rate of return
Cons
Trading costs and interest on amount borrowed
Increase rate of loss
Where is margin usually borrowed from?
Another customer’s margin account
Federal Reserve Boards set amount for how much an investor may borrow up to initially
50% of the value of their securities
margin loans may be made against an existing position in a margin account
Three Forms to add margin to trading account
Credit Agreement - discloses terms of credit, method of interest computation, and description of situation where BD can increase interest rates
Hypothecation Agreement - allows BD to hold securities in the account as collateral for loan, all customer securities must be held in street name when held in margin account
Consent to Loan - gives the firm permission to loan customer’s margin securities to other customers or BDs, usually to provide shares for short sales (not required to trade on margin)
What does being held in street name mean?
Customers securities are held with BD registered in the name of the BD, BD is the nominal or named owner, but the customer is the beneficial owner
Risk Disclosure Document
Before opening margin account, BD must also provide a disclosure document
Must be provided at or before account opening and at least annually
Covers:
customers can lose more money than deposited
customers are not entitled to extension of time to meet margin calls
firms can increase their in house margin requirement without notice
Types of accounts that have margin
Most individual and JT accounts (sole prop accounts too)
Corporate and partnership accounts UNLESS specifically told not too by the charter or agreement (if document is silent then margin is allowed)
Trusts need to be specifically told that they can (if silent then they cannot)
Custodial accounts and retirement accounts cannot have margin
What can be purchased on margin and used as collateral for margin loan?
Exchange listed stocks and bonds
Nasdaq stocks
OTC issues approved by Federal Reserve board
Warrants
Regulation T allows these
What cannot be purchased on margin or used as collateral?
Options
Rights
Non national market system (non-listed) securities
OTC issues not approved by Federal Reserve board
Insurance contracts
These cannot be purchased on margin but can be used as collateral after being held for 30 days:
Mutual funds
New issues (if they can be)
Securities exempt from Regulation T margin requirement
US T bills, notes, and bonds
Government agency issues (GNMAs included)
Munis
Initial Margin Requirements
$0-$2,000 - must deposit 100% (FINRA)
$2,000-$4,000 - must deposit 100% (FINRA)
$4,000-above - must deposit 50% (Regulation T)
Regulation T - 50%
FINRA - Up to $2k needs to be 100%
Maintenance Call
Margin maintenance call (not the same as margin call)
Need to maintain certain amount of equity
If it drops below 25% then need to deposit additional assets (BD may liquidate assets to bring equity to 25% if customer fails to make required deposit by end of day)
Types of different BD accounts
Fee-based
Commission based
Wrap accounts
Fee-based
Customer is charged a regular and ongoing fee for all the trading in the account
More common is fee is based on size of the account based on percentage of account’s value
Best for investors that trade frequently and are not good for those that do buy and hold
Commission based
Customer is charged a fee or commission for every trade
Commission is based on size of trade with larger trades having a smaller percentage size of commission
Best for strategic investors who do not trade frequently
Commission schedule must be disclosed to customer at account opening
Wrap fee accounts
Firms that provide a group of services - asset allocation, portfolio management, executions, and administration for a single fee
Typically is AUM
Generally these are investment advisers so must meet investment advisers act of 1940 and needs to be registered as an investment adviser
Statement that client may be able to get the same services on separate basis for lower cost
Solicited vs Unsolicited Trades
If the rep or communication from a BD recommends buying or selling a certain security then that is solicited
Must be marked as solicited
If client places a trade not suggested by rep then it is unsolicited
Discretionary trading
Customer can give trading authority to registered rep (RR) to place trades without customers permission, that is discretionary
Exercising discretion requires specific authorization and is a type of POA granted by customer to RR
Trades must be marked as discretionary
