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Investment Accounts
BROKERAGE ACCOUNTS
Overview Margin Accounts Cash Accounts Trusted Contacts Account Transfers
Brokerage accounts allow investors to buy and sell numerous types of
investments. When opening a brokerage account, investors have two main options:
a cash account or a margin account. The difference between them is how and when
you pay for your investments.
As the name suggests, when you buy securities with a cash account, you must do
so using cash, paying for the purchase in full. If you want to buy $1,000 worth
of stock, you must have $1,000 in cash in your account before your buy order
settles, which is generally two days after you place the order.
A margin account allows you to borrow money from a brokerage firm to buy
securities. This is also the only type of account in which investors can engage
in short selling. In a margin account, you deposit a portion of the purchase
price of the security in the account and borrow the rest from the firm. There
are a number of noteworthy risks that come with investing on margin, so be sure
to read more about margin accounts before you proceed.
If you already have a brokerage account but aren't sure which type of account
you have, contact your firm. Regardless of your account type, always read
your brokerage account statements and review them carefully for accuracy.
OPENING AN ACCOUNT
Opening an account with a brokerage firm doesn’t take long, but it does require
a few more steps than, say, opening a bank account. Once you select a brokerage
firm, the firm must obtain certain information about you to open your account.
If the firm is going to make investment recommendations to you, it will use this
information to determine the type of investments that may be in your best
interest.
Firms will ask for your age, employment status, other investments, financial
situation and needs, tax status, investment experience and objectives,
investment time horizon, liquidity needs and tolerance for risk. They’ll also
ask for your Social Security or other tax identification number because, like
banks, credit unions and other financial institutions, brokerage firms must
report to the Internal Revenue Service the income you earn on your investments.
In addition, under the USA PATRIOT Act of 2001, financial institutions may use
your Social Security number, as well as your driver’s license, passport
information or information from other government-issued identification, to
verify your identity to help prevent money laundering and terrorist financing.
Note that the terms used to describe investment objectives often vary across
firms and new account applications. If you don't understand the distinctions
among the terms, request more explanation or examples.
If you use an online brokerage firm or mobile platform, this
information-gathering likely won’t involve an actual financial professional.
It’s important that you be honest with your answers. If you lack investment
experience, or if you truly can’t afford to lose money, don’t be afraid to say
so.
Your new account application may come with other documents, such as a "Customer
Agreement," "Terms and Conditions" or the like. These documents, along with
applicable state and federal laws and SEC and FINRA rules, govern your customer
relationship with the firm, so it’s a good idea to read them.
Brokerage account fees vary, as do the products and services a firm offers. You
can learn a lot about a firm’s services and other key information by reading its
Customer Relationship Summary, or Form CRS for short, which you should receive
before or at the time you open your new account.
Once you open your account, you’ll need to make a couple of additional
decisions.
How do you want to manage your uninvested cash? Sometimes there’s cash in your
account that hasn't been invested, such as money you just deposited or cash
dividends or interest you received. Many firms give you choices on what to do
with uninvested cash, including participating in the firm’s cash management
program or “cash sweep” program. These types of programs offer different
benefits and risks, including different interest rates and insurance coverage.
Be sure to find out from your brokerage firm what your choices are and what
fees, if any, you have to pay.
Who will make the final decisions for your account? You’ll have final say on
investment decisions in your account unless you give "discretionary authority"
in writing to another person, such as your financial professional. With
discretionary authority, this person may invest your money without consulting
you about the price, amount or type of security or the timing of the trades.
Some firms allow you to indicate who has discretionary authority over the
account directly on the new account application, while others require separate
documentation. There may be other types of authority that you can provide over
your account, including a power of attorney and authorized trading privileges.
Make sure you think through the risks involved in allowing someone else to make
decisions about your money.
A customer who purchases securities may pay for the securities in full or may
borrow part of the purchase price from their securities firm. If the customer
chooses to borrow funds from a firm, the customer must open a margin
account with the firm.
The portion of the purchase price that the customer must deposit is called
margin and is the customer’s initial equity in the account. The loan from the
firm is secured by the securities that are purchased by the customer. A customer
may also enter into a short sale through a margin account, which involves the
customer borrowing stock from a firm in order to sell it, hoping that the price
will decline. Customers generally use margin to leverage their investments and
increase their purchasing power. At the same time, customers who trade
securities on margin incur the potential for higher losses.
MARGIN REQUIREMENTS
The terms under which firms can extend credit for securities transactions are
governed by federal regulation and by the rules of FINRA and the securities
exchanges. Some securities cannot be purchased on margin, which means they must
be paid for in full using available loan value in the margin account, or the
customer must deposit 100 percent of the purchase price.
In general, under Federal Reserve Board Regulation T, firms can lend a customer
up to 50 percent of the total purchase price of a stock for new, or initial,
purchases. Assuming the customer doesn’t already have cash or other equity in
the account to cover their share of the purchase price, the customer will likely
receive a margin call from the firm. As a result of the margin call, the
customer will be required to deposit the other 50 percent of the purchase price.
For example, if the customer purchases $10,000 of stock, the firm loans the
customer $5,000 and the customer pays the other $5,000.
FINRA rules supplement the requirements of Regulation T by placing "maintenance"
margin requirements on customer accounts. Under these rules, as a general
matter, the customer’s equity in the account must not fall below 25 percent of
the current market value of the securities in the account. Otherwise, the
customer may be required to deposit more funds or securities in order to
maintain the equity at the 25 percent level. The failure to do so may cause the
firm to force the sale of—or liquidate—the securities in the customer’s account
in order to bring the account’s equity back up to the required level.
Margin Transaction—Example
Day 1: You buy $100,000 of margin stocks.
* Regulation T requires you to deposit initial margin of 50 percent, or
$50,000, in payment for the securities. As a result, your equity in the
margin account is $50,000, and you've received a margin loan of $50,000 from
the firm.
Day 2: The market value of the securities loses $40,000, falling to $60,000.
* Under this scenario, your margin loan from the firm would remain at $50,000,
and your account equity would fall to $10,000 ($60,000 market value minus
$50,000 loan amount). However, the minimum maintenance margin requirement for
the account is 25 percent, meaning that your equity must remain above $15,000
(25 percent of the $60,000 market value).
Consequence: Since the required equity is $15,000, your firm will likely issue a
maintenance margin call for $5,000 ($15,000 less existing equity of $10,000). If
so, and if you fail to meet the margin call by the time and date specified by
the firm, the firm could liquidate $20,000 of securities—$5,000 divided by 25
percent in order to meet the maintenance margin call.
Tip: To estimate the potential loss in market value before incurring a
maintenance call, use this formula:
Current Maintenance Excess ÷ (1.00 - maintenance requirement percentage)
On Day 1 in the example above, the securities can lose $33,337 in value before
incurring a margin call:
$25,000 ÷ (1.00 – 0.25) = $33,337
FIRM PRACTICES
Brokerage firms have the right to set their own maintenance margin
requirements—often called "house" requirements—as long as they’re more stringent
than the margin requirements under FINRA rules. These enhanced requirements can
apply broadly or to particular stocks. For example, firms can raise their
maintenance margin requirements for specific volatile stocks to ensure there are
sufficient funds in their customers' accounts to cover large price swings.
These changes in firm policy often take effect immediately and may result in the
issuance of a maintenance margin call. Again, a customer's failure to satisfy
the call may cause the firm to liquidate a portion of (or in certain
circumstances all of) the customer's account.
MARGIN AGREEMENTS AND DISCLOSURES
If you decide to trade stocks in a margin account, carefully review the margin
agreement provided by your brokerage firm. A firm charges interest for the money
it lends its customers to purchase securities on margin, and you need to
understand the additional charges you may incur by opening a margin account.
Your firm is required to provide written disclosure of the terms of the loan,
including the rate of interest and the method for computing interest. Your firm
must also provide periodic disclosures regarding transactions in your account
and the interest charges.
KNOW BEFORE YOU TRADE
Be aware of the following realities before you trade on margin:
* You can lose more funds than you deposit in the margin account. A decline in
the value of securities purchased on margin may require you to provide
additional funds to the firm that has made the loan to avoid the forced sale
of those securities or other securities in your account.
* The firm can force the sale of securities in your account. If the equity in
your account falls below the maintenance margin requirements, under the
law—or the firm’s higher "house" requirements—the firm can sell the
securities in your account to cover the margin deficiency. You’ll also be
responsible for any shortfall in the account after such a sale.
* The firm can sell your securities without notice. Some investors mistakenly
believe that a firm must contact them for a margin call to be valid and that
the firm cannot liquidate securities in their accounts to meet the call
unless the firm has contacted them first. This is not the case. As a matter
of customer relations, most firms will attempt to notify their customers of
margin calls, but they aren’t required to do so.
* You’re not entitled to an extension of time on a margin call. While an
extension of time to meet a margin call might be available to you under
certain conditions, you don’t have a right to the extension or even to be
notified of a margin deficiency.
* Open short-sale positions could cost you. You may have to continue to pay
fees on open short positions even if a stock is halted, delisted or no longer
trades.
MARGIN AND DAY TRADING
A day trade occurs when you buy and sell (or sell and buy) the same security in
a margin account on the same day. Specific margin requirements apply to day
trading in any security, including options. If you actively trade stocks, learn
about day trading.
With a margin account, you can borrow funds to purchase securities; with a cash
account, you cannot.
With a cash account, you’re expected to pay the full amount for all securities
purchased by the settlement date—which, for most securities, means paying for
them two days after you place an order to buy. Note: Options require payment on
the following day.
The name "cash account" causes confusion for some investors who think only cash
can be held in the account. But cash accounts can hold a wide range of stocks,
bonds, mutual and exchange-traded funds, and other securities—as well as cash.
For example, you might have $5,000 in cash and $10,000 in stock in your cash
account.
Additionally, the Federal Reserve Board's Regulation T governs how you use your
cash account to purchase securities. Importantly, under Regulation T, you can
buy securities in a cash account provided that you have sufficient funds in the
account, or if your brokerage firm accepts in good faith that you’ll promptly
make full cash payment for the security. Your brokerage firm must comply with
Regulation T and can take action, such as putting restrictions on your ability
to trade, if it determines that you incur a Regulation T violation.
Your financial firm may request that you give them the name and contact
information of a “trusted contact.” While it’s not mandatory that you do so,
FINRA, the North American Securities Administrators Association (NASAA) and
staff from the SEC Office of Investor Education and Advocacy urge you to
consider providing the name of someone you trust as a contact on your accounts.
WHAT IS A TRUSTED CONTACT?
A trusted contact is a person you authorize your financial firm to contact in
limited circumstances, such as if there’s a concern about activity in your
account and they’ve been unable to get in touch with you.
A trusted contact may be a family member, attorney, accountant or another
third-party whom you believe would respect your privacy and know how to handle
the responsibility. You may establish more than one trusted contact.
WHO SHOULD HAVE A TRUSTED CONTACT?
We suggest a trusted contact for anyone who has an investment account.
WHY WOULD YOU ADD A TRUSTED CONTACT TO YOUR ACCOUNT?
Among other things, having one or more trusted contacts provides another layer
of safety on your account and puts your financial firm in a better position to
help keep your account safe.
Naming someone as a trusted contact does not give that person any authority to
act on your behalf, execute transactions or engage in activity in your account.
HOW WOULD HAVING A TRUSTED CONTACT HELP ME?
Maybe you’re traveling. Maybe you‘ve been displaced by a natural disaster. Maybe
there’s a concern about fraud. Or maybe you’re having a health issue. A trusted
contact can help your firm connect with you.
A trusted contact may be asked to confirm your current contact information,
health status or the identity of any legal guardian, executor, trustee or holder
of a power of attorney. U.S. broker-dealers are required to provide and other
financial firms may provide a written disclosure that lays out these details.
WHAT AUTHORITY DOES A TRUSTED CONTACT HAVE ON YOUR ACCOUNT?
Designation as a trusted contact doesn’t provide the designated person with
authority to make transactions in your account and doesn’t make that person a
power of attorney, legal guardian, trustee or executor.
By designating a trusted contact, you’re authorizing the firm to contact someone
you trust and disclose information about your account only in limited
circumstances. A firm may only disclose reasonable categories of information
with a trusted contact, including information that will assist the firm in
administering the customer’s account.
Unless separately authorized, a trusted contact:
* cannot make trades in your account and
* cannot make decisions about your account.
A trusted contact is simply someone who can help your financial firm help you,
if needed.
HOW CAN YOU ADD A TRUSTED CONTACT TO YOUR ACCOUNT?
You can contact your financial firm or investment professional and ask to add a
trusted contact to your account at any time! You can also ask your financial
firm to change or update your trusted contact information at any time.
You may be asked to add a trusted contact when you log on to your investment
account online. Your financial firm may send notices to you, via email or
regular mail, that include instructions for adding a trusted contact to your
account. Before clicking on any link in an email notice about a trusted contact,
make sure you verify that your firm sent the email.
If you decide to name a trusted contact, you might want to reach out to them in
advance to let them know.
If you haven’t yet named a trusted contact, add one today!
LEARN MORE:
Download the Factsheet
SEC Investor Bulletin: Please Consider Adding a Trusted Contact to Your Account
NASAA: Serve Our Seniors Website
FAQ Regarding FINRA Rules Relating to Financial Exploitation of Senior Investors
FINRA News: FINRA, NASAA and SEC OIEA Urge Investors to Establish a Trusted Con…
MORE QUESTIONS ABOUT YOUR INVESTMENT ACCOUNTS?
You can call the following for assistance:
* FINRA Securities Helpline for Seniors® at 844-57-HELPS (844-574-3577)
* Your state or provincial securities regulator (contact information here)
* The SEC’s Office of Investor Education and Advocacy (contact information
here)
There may come a time when you want to transfer your securities accounts between
broker-dealers. If so, here’s what you need to know.
Most customer accounts are transferred between broker-dealers through an
automated process. The National Securities Clearing Corporation (NSCC) operates
the Automated Customer Account Transfer Service (ACATS) to facilitate the
transfer of a customer account from one broker-dealer to another. Transfers
involving the most common assets—for example, cash, stocks and bonds of domestic
companies and listed options—are readily transferable through ACATS.
The account transfer process begins by completing a Transfer Initiation Form
(TIF) and sending it to the firm to which you want to transfer your account. The
firm to which you plan to transfer the account can provide the form to
facilitate the transfer. The new firm is called the "receiving firm." Once the
receiving firm receives the TIF, it begins the transfer process by communicating
with the current or "delivering firm" via ACATS.
Once the transfer request is validated, the delivering firm will send a list of
the assets in the account to the receiving firm via ACATS. The receiving firm
will review the list of assets to decide whether it wishes to accept the
transfer of the account.
Note: Brokerage firms are not required to open or accept the transfer of an
account and can decide which investments they choose to accept.
The most common reason for declining the transfer of an account is the new
firm’s credit policies. For example, the new firm may decide not to accept the
account due to the quality of securities supporting a margin loan or because the
account does not meet its minimum equity requirements.
TIME FRAMES
Once the customer account information is properly matched and the receiving firm
decides to accept the account, the delivering firm will take approximately three
days to move the assets to the new firm. This is called the delivery process. In
total, the validation process and delivery process generally take about six days
to complete.
Transfers where the delivering entity is not a broker-dealer (for example, a
bank, credit union or mutual fund) generally take more time. In addition,
transfers of accounts requiring a custodian, like an individual retirement
account (IRA) or a custodial account for a minor child, may also take additional
time.
TRANSFER TIPS
Here are a few things you can do to ensure a smooth transfer of accounts from
one brokerage firm to another:
* Ask the new firm whether any specific policies or constraints might impact
the transfer of your account. For example, if you have a margin account, you
should ask if the new firm will accept a margin account and, if so, what its
minimum requirements are.
* Discuss the anticipated length of the transfer process given the specific
type of accounts (e.g., cash, margin, IRA, custodial) and the assets (e.g.,
stocks, bonds, options, limited partnership interests) you may hold.
* Find out how the firm informs customers that the transfer process is
complete.
And keep the following in mind: Buying and selling securities during the account
transfer process often complicates and delays the transfer. Some firms may
even "freeze" an account that is in the process of being transferred, meaning
that no trades will be permitted until the transfer is complete. It’s often best
to avoid trading during the transfer process.
PLANNING AHEAD
Sometimes overlooked in estate management is the transfer of securities from a
brokerage account upon the death of the account holder. Planning ahead can
smooth the transfer process a great deal, making it more efficient and
trouble-free for brokerage account holders and their heirs and beneficiaries.
WHEN A FIRM CLOSES
Though the idea might cause some anxiety, the closure of a brokerage firm is
usually a smooth process for customers. Multiple safeguards exist to protect
customer assets, and in almost all cases, accounts are transferred in an orderly
fashion to another brokerage firm.
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