Unit 1

Question 1

What is a cash account?

Answer 1

An account in which the customer is required by the Fed’s Regulation T to pay, in full, for securities purchased no later than two days after the standard payment period set by the Uniform Practice Code.

Question 2

What accounts can only be opened as cash accounts?

Answer 2

Personal retirement accounts (IRAs), corporate accounts (401ks), custodial accounts (UTMA, ESAs)

Question 3

What is a margin account?

Answer 3

An account with a broker-dealer where the firm lends money to the client to purchase securities.

Question 4

What is margin?

Answer 4

The amount of equity contributed by a customer as a percentage of the current market value of the securities held in a margin account.

Question 5

What is a fee-based account?

Answer 5

An account that is charged a single fee (either fixed or a percentage of assets in the account) instead of commission-based charges for brokerage services.

Question 6

What is churning?

Answer 6

Excessive trading in a customer’s account with the view to generate comissions.

Question 7

What is reverse churning?

Answer 7

The unsuitable practice of placing a client who trades in frequently in a fee-based account rather than a commission-based account that would be more appropriate

Question 8

What is a wrap-fee account?

Answer 8

Account for which firms provide a group of advisory services in addition to brokerage services.

Question 9

What is a prime brokerage account?

Answer 9

Account in which a customer - generally an institution - selects one member firm (the prime broker) to provide custody, trading, and other services, while other firms, called executing brokers, typically execute most of the trades placed by the customer.

Question 10

What is a day trader?

Answer 10

Someone who buys and sells the same security on the same day to try to take advantage of intraday price movements.

Question 11

What is a pattern day trader?
What is the minimum equity requirement to be one?

Answer 11

Someone who executes four or more day trades in a five-business-day period.
$25,000; they must have on deposit at least $25,000 in the account equity on any day in which day trading occurs.

Question 12

What is sole proprietorship?

Answer 12

The simplest form of business organization and is treated like an individual account. All income (or loss) is that of the individual.

Question 13

What is a general partnership?

Answer 13

An unincorporated association consisting of two or more individuals. The partners manage and are responsible for the operations and debts of the business.They allow the profits and losses of the business to flow directly through to the investors as passive income (or loss) for tax purposes, thus avoiding double taxation of profits at the business and individual levels.

Question 14

What is a limited partnership?

Answer 14

The management (and liability) is assigned to the general partner(s), while the limited partner(s) are passive and have liability limited to their investment.

Question 15

What is a Limited Liability Company (LLC)?

Answer 15

A business structure that combines benefits of incorporation (limited liability) with the tax advantages of a partnership (flow-through of taxable earnings or losses). The LLC owners are members (not shareholders) and are not personally liable for the debts of the LLC.

Question 16

What is an S corporation?

Answer 16

Although taxed like a partnership, offers investors the limited liability associated with corporations in general. The profits and losses are passed through directly to the shareholders in proportion to their ownership in the S corporation. They may not have more than 100 shareholders, none of whom may be nonresident alien, or more than one class of stock (presumably common).

Question 17

What is a C corporation?

Answer 17

A business structure that distinguishes the company as a separate entity from its owners. If a business expects to need significant capital, this form is always the preferred choice. Earnings are subject to double taxation.