Cash Accounts

Lesson

Cash accounts are brokerage accounts used for trading securities.

Practice Question #1

Which of the following is a key difference between a cash account and a margin account?

A) The ability to borrow funds from the broker

B) The requirement to pay for securities in full

C) The use of payment for order flow

D) The settlement period for trades

Select an option above to see an explanation here.

A) Cash accounts require investors to pay for securities in full, while margin accounts allow investors to borrow funds from the broker. B) Both cash and margin accounts require payment for securities; cash accounts require full payment, while margin accounts allow borrowing. C) Payment for order flow is a practice that can occur in both cash and margin accounts. D) The trade settlement period is generally the same for cash and margin accounts.

Terms

Cash Account:: A brokerage account where the investor must pay for securities in full at the time of purchase.
Settlement Date:: The date by which a trade must be paid for and the securities delivered.
Regulation T:: A Federal Reserve regulation governing the extension of credit by brokers and dealers.

Practice Question #2

What is the standard settlement period for most securities transactions?

A) T+1

B) T+2

C) T+3

D) T+4

Select an option above to see an explanation here.

A) T+1 is not the standard settlement period for most securities transactions. B) T+2 is the standard settlement period for most securities transactions, meaning the trade must be settled within two business days. C) T+3 is not the standard settlement period for most securities transactions. D) T+4 is not the standard settlement period for most securities transactions.

Do Not Confuse With

Margin Account:: A brokerage account where the investor can borrow money from the broker to purchase securities.

Practice Question #3

Which of the following is a violation that can occur in a cash account?

A) Margin Call

B) Maintenance Margin

C) Good Faith Violation

D) Short Selling

Select an option above to see an explanation here.

A) Margin calls are related to margin accounts, not cash accounts. B) Maintenance margin is a requirement in margin accounts, not cash accounts. C) A good faith violation occurs when an investor sells a security in a cash account before paying for the purchase. D) Short selling is a practice that typically occurs in margin accounts, not cash accounts.

Historical Example

In the 1920s, many investors used margin accounts to purchase stocks with borrowed money, contributing to the stock market crash of 1929. This led to the implementation of Regulation T, which established rules for using margin accounts and helped promote using cash accounts for more conservative investors.

Practice Question #4

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Example Series 65 Example Practice Question

Real-World Example

An investor opens a cash account with a brokerage firm and deposits $10,000. They purchase $5,000 worth of stock in Company A and must pay for the purchase in full within the T+2 settlement period. They cannot use borrowed funds from the broker to make this purchase, as they would in a margin account.

Practice Question #5

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Example Series 65 Example Practice Question

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