Cash vs. Margin Accounts
In a cash account the customer pays in full for every purchase; in a margin account the customer borrows part of the price from the firm, pledging the securities as collateral and signing margin agreements first.
The exam loves the “which account can’t use margin?” filter. The tell is a customer type plus a borrowing strategy: a custodial UGMA/UTMA or a retirement account (IRA) flagged for margin is the wrong answer, because the question hinges on what the account legally permits, not on whether margin “seems risky.” (A few brokers now offer “limited margin” IRAs that only sidestep settlement timing, but the SIE answer is still: retirement and custodial accounts trade as cash accounts.)
The classic trap is blurring three siblings. Regulation T is the numbers layer — the 50% initial requirement set by the Federal Reserve; cash-vs-margin is the account-type layer; freeriding is what happens when you trade a cash account like a margin account — buying a security and selling it before paying triggers a 90-day freeze (during which purchases need cash up front). Memory hook: margin = “buy now, pay when you sell or get called”; cash account = settle up, no IOUs.
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