Brokerage Accounts

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:

On Day 1 in the example above, the securities can lose $33,337 in value before incurring a margin call:

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: The receiving firm isn’t required to accept the transfer of an account. If a transfer isn’t accepted, it may be because there are certain assets in the account that are nontransferable, such as a third-party fund or product for which the receiving firm doesn’t have a selling agreement or a proprietary product of the delivering firm. Firms are required to notify customers of any nontransferable assets and to provide alternatives for disposition.

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.