Securities Accounts: Types & Characteristics

Instructor: Bryant Trombly

Bryant has taught graduate finance and has an MBA and master's degree in information technology.

In this lesson you will learn the types and characteristics of many common securities accounts including cash, margin, commission, fee-based, advisory, and more.

Differences in Securities Accounts

Today is a big day. Jackie is sitting down with her advisor Jim to open an investment account with the bonus she received from work. But before she does so, Jackie and Jim must go over all the different types of accounts and decide which is the best for Jackie and her goals.

Jackie soon learns from Jim that there are lots of types security accounts that differ based on their characteristics. Jackie wants to get to know each one to understand how they work in regards to differences in settlement, authority, and fee structures.

Differences in Settlement

'Settlement' refers to the manner in which a securities transaction will be completed. Most often this will be the exchange of cash and some sort of investment security between the buyer and the seller.

Transactions entered in a cash account must be settled with cash on hand. Jackie can only buy securities with cash that is in the account and any position sold must settle before she can use the cash from the transaction for another purchase or withdrawal.

Transactions entered in a margin account allow the account owner to borrow funds against the value of the account itself. Jackie could immediately reinvest proceeds from a security sale or to purchase more securities than the available amount of cash in the account.

Excessive use of margin capabilities may result in an account being labeled as a pattern day trader account. If Jackie buys and sells the same security on the same day four or more times in five business days, she will probably get this label. Her account would then be subject to increased margin requirements by the Financial Industry Regulatory Authority (FINRA).

There are further considerations in regard to settlement that are addressed by delivery vs payment/receive vs payment (DVP/RVP) accounts. In DVP/RVP accounts, the exchange of cash and securities happen simultaneously and settlement only occurs when this has happened.

Differences in Authority

Who has the authority to decide what and when to buy and sell in an account? If that authority lies solely with the account owner, then this is a non-discretionary account. Jackie has an account advisor, Jim. If only she decides when to buy and sell, then Jim must seek approval from her before entering a transaction.

If she instead lets Jim have this authority, this is considered a discretionary account. In this case Jim may enter transactions on her behalf and in her best interest.

Differences in Fees

Another important characteristic for a securities account is how it is charged fees.

A commission fee structure charges the account a fee for every transaction, such as a fee to purchase a security and then a fee when it has been sold. This fee may either be a flat amount per transaction or a variable amount based on the number of shares or market value of the transaction.

A fee-based structure charges account fees that are independent of the number of transactions made in an account. In this case the fees may be based on a percentage of the market value of the account, a flat fee retainer charged annually or monthly, or even an hourly rate based on how much an account owner works with an advisor.

Depending on how much Jackie trades in her account she may want to consider either type of fee structure.

Specialized Accounts

What happens when you combine some of these characteristics? A popular account type is what is known as an advisory account. These accounts are characterized by their discretionary and fee-based nature. In this case, Jackie's account advisor Jim will execute an agreed upon investment strategy within an account on a discretionary basis. The fee he'll charge will be an agreed upon percentage of the assets in her account.

In an investment account Jim would also be considered a fiduciary. This is a legal term that requires the advisor to act in the best interest of the account owner at all times and to avoid all potential conflicts of interest.

Accounts may also be characterized by the types of investment securities that may be held within it. An options account is one which has been specifically approved for buying and selling options (a type of derivative security) within them. Because of the complex nature of options and the increased risks involved, accounts must be specifically approved to address these concerns.

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