In a Cash Account clients purchase investment securities and are expected to pay for those securities in full. Upon receipt of payment from the client, the brokerage firm segregates those securities (see Possession and Control) from those belonging to both the firm and other clients, and holds them on behalf of the client until such time that the client liquidates the position or sells the securities.

Upon selling securities in the cash account, the full proceeds of the sale are generally available to the investor. The client can freely reinvest the proceeds or withdraw them from the account.

Special handling rules and requirements that pertain to cash accounts are discussed in detail in the Margin Department section.

In a Margin Account clients are required to deposit only part of the purchase amount for an investment in marketable securities. The remainder of the purchase amount is borrowed from the brokerage form in the form of a Margin Loan. Clients pay the brokerage firm Margin Interest on the loan. The amount of credit extended to a client trading securities in a margin account is dependent on the type of securities traded and the current market value of those securities.

It is important to note that upon liquidation of securities purchased on margin the full proceeds of the sale are generally not available to the brokerage client. The sale proceeds are first used to satisfy the loan incurred at the time the securities were purchased and any outstanding margin or NYSE calls in the client’s account. The special rules applicable to margin accounts are discussed under Margin Department.

The primary advantage of a Margin Account is that clients are able to obtain greater investment leverage. That is, because of the Margin Loan, clients are able to acquire more investment securities in a Margin Account than would be possible had the same sum of money been invested in a Cash Account. The client receives all the benefits of ownership of the investment in the Margin Account – i.e. distributions and capital gains. The brokerage firm receives only the interest payment for the Margin Loan.

However, the Margin client also bears all the risks associated with the investment in the Margin Account. Just as the extent of any gain is leveraged in a Margin Account, so too is the extent of any loss. Further, in the event of a loss in a Margin Account, the brokerage firm still receives its interest payment for the original Margin Loan.

In a Short Account the client sells securities that are not owned. An investor establishes a Short Position when that investor believes that the value of that investment security will decrease over time. The client receives the full sell proceeds at the time of the original sale.

To close or remove a Short Position the client must eventually ‘buy back’ the securities that were sold short. The difference between the purchase price and the original sale price is the client’s gain (the securities depreciated) or loss (the securities appreciated).

Special rules apply to clients investing in Short Accounts. These rules are explained in greater detail under Margin Department.

In a Delivery vs. Payment Account clients buy and sell securities that are not held at the brokerage firm executing the trades. The investor’s account is held at another firm that acts as a fiduciary agent for the investor. On settlement date the executing broker exchanges securities and funds with the client’s agent in settlement of the executed trade or trades. The brokerage firm opens a Delivery vs. Payment account for clients who wish to participate in this type of arrangement.

When a client purchases securities in a Delivery vs. Payment account, the brokerage firm delivers the purchased securities to the client’s agent on settlement date. The agent, in turn, remits payment for the purchased securities to the executing broker.

When a client sells securities in a Delivery vs. Payment account, the client’s agent delivers the sold securities to the executing broker on settlement date. The broker, in turn, remits the sale proceeds for the sold securities to the agent.

Although there are no hard and fast rules for how a particular brokerage firm structures its account numbers, the account number typically contains the following components:

The typical brokerage firm has multiple branches - or satellite offices- located in different geographical regions. Part of the typical account structure identifies the branch office that services the investor. The branch designation can be numerical digits, alphabetical characters, or a combination of both, and is determined by the individual brokerage firms.

For example, a brokerage firm might have remote branches in the New York Cite, Boston, Houston and Los Angeles. The firm might use the following branch designations in its account numbers:

Within each branch, each client account must have its own unique identifier. This unique identifier is the client’s account number. Again, depending on the particular firm, this account number might contain letters, numbers or a combination of both. No matter what the structure however, no two clients within the same branch can have the same account number.

For example, consider the following two brokerage clients – both are service by the firm’s Boston office.

• Cash
• Margin
• Short
• Delivery vs. Payment

As with Branch and Account Number, different firms use different means of identifying the account type. Continuing with this example, we will use the first letter of the account type as the identifier for the account number. Therefore, our theoretical client accounts now look like this:

A Check Digit is nothing more than a system driven Edit Check. An Edit Check is a computer validation routine that – in the case of account numbers – reviews an account number that has been entered into the brokerage system to determine whether or not the entered account number is valid.

To determine the Check Digit for a given account, the account number is typically run through a computerized routine or calculation. The result of this routine is generally a number or letter. This number or letter is added to the account number as follows.

For example, the hypothetical account number for John B. Goode – BOS-23456-C – is run through the Check Digit routine. The result is 7. The same is done for the Justine Tyme account – the result is 4.