What best describes the defining feature that distinguishes a margin account from a cash account?
- AA margin account may hold equities, while a cash account may hold only mutual funds and money market instruments.
- BA margin account is available only to institutional customers, while a cash account is the only type available to retail customers.
- CA margin account settles trades on a same-day basis, while a cash account settles on the regular-way schedule.
- DA margin account permits a customer to borrow part of the purchase price from the firm, while a cash account requires the full purchase amount to be paid. Correct
Why A is wrong: This is tempting because product menus feel account-specific, but it is wrong: both cash and margin accounts can hold equities, and the distinction is about credit, not eligible products.
Why B is wrong: This is tempting because institutions trade on margin heavily, but it is wrong: retail customers may open margin accounts once they sign a margin agreement and meet suitability requirements.
Why C is wrong: This is tempting because settlement varies by product, but it is wrong: settlement timing is set by the security type and regulation, not by whether the account is cash or margin.
Why D is correct: This is correct because the essence of a margin account under Regulation T is the extension of credit by the broker-dealer, whereas a cash account requires payment in full for all purchases.