GUIDELINES TO USE CASH & MARGIN ACCOUNTS

 

 

Cash .vs. Margin account

Clients can have either a cash or a margin account. The simple cash account is only suitable for investors who place orders sporadically. There is no difference in commissions between cash and margin accounts.

 

Rules and Regulations

Cash and margin accounts are governed by U.S. federal rules and regulations commonly known as ‘Regulation T’. Financial bodies like the NYSE and the NASD ensure that their member firms apply these rules. Our depositary, U.S. Clearing, enforces these rules and regulations strictly. Therefore we strongly advise you to familiarize yourself with all rules and regulations applicable to your type of account.

CASH ACCOUNT

READING THE 'BALANCES' SCREEN OF A CASH ACCOUNT 

 

 

How much money do I have to invest?

The total under balances is the total amount of money you have at your disposal to invest at the start of the day. This total is what you currently have in your money fund plus (or minus) the net amount of all your executed buy and sell orders over the last 3 days.

 

Example:

Suppose you open an account and you put $10.000 in. After 3 days your money will be automatically swept in the interest bearing money fund. Balances will then look as follows:

 

   Cash                    0

   Money fund  10.000

   Total             10.000 (you have 10.000 available to invest)

 

One day you decide to buy $4.000 of stock. The next day your balances will look as follows:

 

   Cash            (4.000)

   Money fund  10.000

   Total              6.000 (you have 6.000 available to invest)

 

Three days later, and you don’t buy or sell any other stocks, the trade is effectively settled and the balances will look like this:

 

   Cash                  0

   Money fund 6.000

   Total             6.000

 

What is the total value of my positions?

The total indicated under ‘market value of securities’ is the total value of all positions. All stocks, funds and options are valued at yesterday’s closing price. (The value of each individual position is available on the ‘Positions’ screen).

 

What is the total value of my portfolio?

The total value of the portfolio (positions + cash) is indicated on the balances screen as ‘Net equity’.

 

RULES & REGULATIONS FOR THE CASH ACCOUNT

All stock/option/fund buys have to be paid in full

This is the crucial rule for a cash account. What does it mean? You need to have on your account a sufficient amount of money to pay for all stocks you buy during a trading day, even if you resell the stock(s) the same day. So either your total in balances is sufficient to cover all your buys or you increase your purchasing power by selling stocks you already own before buying.

 

Example 1: A day when you only buy

You buy two stocks on the same day. One for $10.000, the other for $5.000. Total required is $15.000. There are two possibilities.

- Possibility 1 : you have $15.000 on your account. Either in cash at the start of the day or because you sold one or more stocks before buying. This is how it should be.

- Possibility 2 : you don’t have $15.000 on your account. What to do? You have either 5 days to add money to your account or you have 2 days to sell another stock which you already paid for. Failure to implement one of these two solutions within the stipulated deadline will automatically lead to a so-called ‘extension’. A total of 5 extensions over a 12-month period results in your account being restricted for internet orders during 90 days.

 

Example 2: You buy and sell the same stock during the same day (= day trade)

You buy two stocks on the same day. One for $10.000 which you resell for $11.000. Then you buy the other one for $5.000. Total required is still $15.000. There are again two possibilities.

- Possibility 1: you have $15.000 on your account. Either in cash at the start of the day or because you sold one or more stocks before buying. Perfect, this is how it should be.

 

- Possibility 2: you don’t have $15.000 on your account. Because you did a day trade (buying and selling the same stock on the same day) on a cash account without having the money, Regulation T requires your account to be restricted for internet orders during 90 days.

 

Note: If you do day trades you should always use a margin account. In the above example on a margin account you would only be required to have $4.000 (= -10.000 -5.000 +11.000) of your own money or you can use your credit line. You never run the risk of a 90-day restriction on a margin account. This is why a margin account is much more suitable for the active investor.

 

MARGIN ACCOUNT

 

A margin account, besides offering many other advantages for the active investor, allows you to borrow money with your portfolio as collateral to buy more stocks. Only after you have invested all your own resources will we lend you money, never before. 

 

READING THE 'BALANCES' SCREEN OF A MARGIN ACCOUNT

 

 

How much money do I have to invest?

The total in the ‘Balances’ box is the total amount of your own money you have at your disposal to invest at the start of the day. This total remains positive as long as you do not borrow money. If the amount given as total is negative (i.e. the number is shown between brackets) it indicates the amount of money you are currently borrowing.

 

How much can I borrow ?

Your potential credit line for the day is indicated as ‘margin buying power’ on the lower right-hand side of the ‘Balances’ screen. Margin buying power is re-calculated each day.

Note: if you still have resources of your own your margin buying power is actually higher than the number displayed. Indeed, each dollar of own resources will create an additional dollar in margin buying power. Example: margin buying power indicates $10.000 and your own total in balances is $2.500. In this case you can add $2.500 to your $10.000 margin buying power.

 

What is the total value of my positions?

The total indicated under ‘market value of securities’ is the total value of all your positions. All stocks, funds and options are valued at yesterday’s closing price. (The value of each individual position is available on the ‘Positions’ screen).

 

What is the total value of my portfolio?

The total value of the portfolio (positions + cash) is indicated on the balances screen as ‘Net equity’.

 

RULES & REGULATIONS FOR THE MARGIN ACCOUNT

 

   - Enter the order correctly 

   - All same day buy and sell orders are netted

   - Respect your NYSE excess – the limit to day trades

   - Respect a house call

   - Maintain % of equity above 35%

   - Respect a fed call 

 

Enter the order correctly

When placing an order always choose ‘margin’ as account type in the ‘stock trade’ screen.

 

All same day buy and sell orders are netted

One of the main advantages of a margin account is that all same day buy and sell orders are netted. 

 

Example : Suppose you buy two stocks on the same day. One for $10.000 which you resell for $11.000. Then you buy the other stock for $5.000. On a cash account you would require $15.000 for such a transaction. On a margin account you need $4.000 of your own money (if you don’t want to borrow) or you can use your margin buying power if sufficient.

 

Respect your NYSE excess – the limit to day trading

On the ‘Balances’ screen the system indicates your NYSE excess for the day. NYSE excess multiplied by 2 gives you the limit of your day trading capability. A day trade is defined as a buy and a sell of the same stock during the same day. The combined total of all buys during the same day (be it one single buy or several smaller consecutive buys) may not exceed 2x NYSE excess. The number of day trades is unlimited as long as the total size of the combined open positions does not exceed 2x your NYSE excess. If you go over 2x NYSE excess you’ll get a day trade call indicating that you need to add money to your account.

 

Maintain % of equity above 35%

On the ‘Balances’ screen, ‘% of equity’ represents your portion of the value of the securities held on the margin account. These stocks serve as collateral against any debit on the margin account. In case of a depreciation in the value of the securities, % of equity will be reduced. You must ensure that ‘% of equity’ always stays above 35%. Another way of looking at it is that the value of the stocks must always exceed 1.53 times the size of your debit. Example : You use $10.000 of cash to buy $20.000 of stocks on the margin account. Your account shows a debit of $10.000 and $20.000 worth of stocks, % of equity = (20.000-10.000)/20.000 = 50% > 35%.

 

Respect a House Call

On the ‘Balances’ screen the system will indicate if you have a house call. What is this? It is a margin call triggered by an excessive depreciation of the securities held in your margin account. Contrary to % of equity, a house call takes into account the specific margin maintenance requirements of each stock. These margin requirements vary according to each stock’s volatility. Once you have a house call you have 5 days to cover it completely. Covering can be done by (1) transferring cash and/or stocks into your account (i.e. increase the size of your collateral) or, (2) by selling some stocks (i.e. reduce the size of your borrowing). A rise in value of the stock appreciation can reduce or eliminate the house call.

Note: if you want to cover your house call by selling stocks we advice you to give us a call as different stocks can cover more or less of a house call.

 

Respect a Fed Call

On the ‘Balances’ screen the system automatically indicates if you have a Fed Call. What is this? A margin account allows you an automatic credit line called margin buying power. If you spend more than your margin buying power you will get a Fed Call. Once you have a Fed Call you have 5 days to cover it completely. Covering can be done by (1) transferring cash and/or stocks into your account or, (2) by selling some stocks for twice the value of the fed call. It helps if the value of your stocks goes up during the 5 days you have to cover the fed call.

 

Note: It can happen that you get a fed call and a house call at the same time. In this case you only need to cover the larger of the two.