HBCU Money™ B-School: Types of Brokerage Accounts


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By Investor.gov & Securities Exchange Commission

A cash account is a type of brokerage account in which the investor must pay the full amount for securities purchased. In a cash account, you are not allowed to borrow funds from your broker to pay for transactions in the account.

A margin account is a type of brokerage account in which your brokerage firm can lend you money to buy securities, with the securities in your portfolio serving as collateral for the loan. As with any other loan, you will incur interest costs when you buy securities on margin.

There are risks involved in purchasing securities on margin. For example, if you buy on margin and the value of your securities declines, your brokerage firm can require you to deposit cash or securities to your account immediately. It can also sell any of the securities in your account to cover any shortfall, without informing you in advance. The brokerage firm decides which of your securities to sell. Even if the brokerage firm notifies you that you have a certain number of days to cover the shortfall, it still may sell your securities before then. A brokerage firm may at any time change the threshold at which customers are subject to a margin call.

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