Cash vs Margin Accounts Explained for the SIE Exam

In a cash account, you pay 100% of the purchase price up front — no borrowing. In a margin account, you deposit part of the cost and borrow the rest from your broker, using the securities you buy as collateral. That margin loan increases your buying power, which magnifies both your gains and your losses. On the SIE — 75 scored questions in 105 minutes, passing score 70 — account types sit in “Understanding Trading, Customer Accounts and Prohibited Activities,” the second-largest section at 31% of the exam.

Cash accounts

A cash account is the default, and the rule is simple: no borrowing. You pay the full price of every purchase by settlement, which is now T+1 — one business day after the trade. Your risk is limited to the money you put in; you can never lose more than you invested.

Some transactions must be done in a cash account, paid in full. Long option purchases (buying calls or puts) can’t be bought on margin — you pay the full premium. New-issue IPOs and newly purchased mutual fund shares generally can’t be margined until after a holding period (typically 30 days). Cash accounts have no margin calls and no minimum-deposit rule beyond the cost of the trade itself.

Margin accounts

In a margin account, you borrow from your broker to buy securities. Under the Federal Reserve’s Regulation T, you can borrow up to 50% of the purchase price of most marginable stocks — so buying $10,000 of stock takes about $5,000 of your own cash plus $5,000 borrowed. You pay interest on the loan, and the broker holds your purchased securities as collateral.

The point of margin is leverage: controlling twice the stock for a given amount of your own cash roughly doubles the percentage swing in your equity. Say you put in $5,000 and buy $10,000 of stock:

• If the stock rises 50% to $15,000, you repay the $5,000 loan and keep $10,000 — your $5,000 became $10,000, a 100% gain. The cash buyer who paid $10,000 gains only 50%.
• If the stock falls 50% to $5,000, you repay the $5,000 loan and are left with nothing — your equity is wiped out entirely, and you still owe the interest. The cash buyer is down 50% but owes no one.

That two-edged leverage is why margin accounts carry margin calls when equity falls too low — something a cash account never faces.

How individual orders get placed and filled — market, limit, stop, stop-limit — is a separate SIE topic worth pairing with account type.

Regulation T and the margin numbers

Two different regulators set two different numbers, and the SIE loves to test whether you can keep them straight.

• Initial margin — Regulation T (Federal Reserve): 50%. At the time of a margin purchase, you must deposit at least half the price (or equivalent marginable securities).
• Maintenance margin — FINRA: 25% for long stock. After you buy, your equity must stay at least 25% of the position’s market value. Fall below, and you get a margin call. Firms often set higher “house” minimums, commonly 30–40%. For short stock positions, the FINRA maintenance minimum is generally 30%.
• Minimum to open — FINRA: $2,000. You need at least $2,000 in equity to trade on margin (or 100% of the purchase price if the securities cost less than $2,000 — you’re never required to deposit more than the full price).

The clean version: Reg T 50% is the Fed’s initial requirement; FINRA’s 25% is the ongoing maintenance minimum for a long position.

Opening a margin account: the agreements

To open a margin account you sign a margin agreement, which has three parts:

• Credit (loan) agreement — the terms of the loan: how interest is calculated and your obligation to repay. It’s the “this is a loan” part.
• Hypothecation agreement — you pledge your marginable securities as collateral for the loan. You keep ownership; the broker gets a lien, like a mortgage on a house. This also lets the broker rehypothecate — use your pledged securities as collateral for its own borrowing.
• Loan consent agreement (optional) — lets the broker lend your margin securities to others, such as short sellers. This one is optional; if you don’t sign it, the firm typically still opens the account and simply won’t lend your shares. Signing it doesn’t affect your ownership — you can still sell any time.

Marginable vs non-marginable securities

Most large, listed stocks (NYSE, Nasdaq) and many bonds are margin-eligible. The ones the exam wants you to flag as paid-in-full only are:

• Options — long calls and puts have no loan value; you pay the premium in cash.
• New issues (IPOs) — can’t be bought on margin for an initial period, typically 30 days.
• Mutual funds — newly purchased shares can’t be margined for about 30 days; after that, fully paid shares can serve as collateral like stock.

Securities in retirement accounts, most OTC pink-sheet stocks, and various unregistered shares are also not marginable.

Margin calls and risk

A margin call happens when your equity falls below the required level — either because your securities dropped below the maintenance requirement, or because you didn’t meet the initial Reg T deposit in time. You must add cash or marginable securities right away. If you don’t, the broker can sell securities in your account to cover the shortfall — and here’s the part the exam tests: the broker can liquidate your positions without your consent, is not required to notify you first, and doesn’t have to sell only the position that caused the call. You remain responsible for any remaining loan balance.

The core risk: with margin, your losses can exceed your initial deposit. In a cash account, the worst case is losing what you invested; on margin, you can lose your equity and still owe interest on the loan.

Feature	Cash account	Margin account
Payment	100% up front	~50% up front (Reg T), rest borrowed
Borrowing	None	Borrow from broker (pay interest)
Collateral	None	Purchased securities pledged as collateral
Leverage	None	Yes — roughly doubles buying power
Key rules	Full payment by T+1	Fed Reg T 50% initial; FINRA 25% maintenance (long)
Minimum to open	None beyond the trade cost	$2,000 (or 100% of the price if that’s less)
Main risk	Losses limited to what you invested	Losses can exceed your deposit; broker may liquidate without consent

Exam traps to avoid

• Reg T vs FINRA. Reg T is the Federal Reserve’s rule and it’s 50% initial margin. FINRA’s maintenance minimum is 25% (long). Don’t swap them.
• Maintenance is 25%, not 50%. Long-stock maintenance is 25% of market value; short stock is generally 30%.
• Hypothecation is your pledge. It means your securities secure your loan — think “my stock is the collateral.”
• The firm can sell without asking. In a margin call, the broker can liquidate your securities without notifying you first and without waiting.
• Some things are cash-only. You can’t buy long options on margin, and new issues and mutual funds must be paid in full (marginable only after ~30 days).
• Settlement is T+1. Cash purchases settle one business day after the trade — not T+2.

Once Reg T vs FINRA maintenance and the hypothecation/loan-consent split feel automatic, test yourself with the free SIE diagnostic to see how the SIE actually frames margin questions.

Frequently asked questions

What’s the difference between a cash and a margin account?

In a cash account you pay the full cost of your securities with your own money by settlement. In a margin account you deposit part of the price and borrow the rest from the broker, which holds your securities as collateral. Margin gives you extra buying power but magnifies losses.

What is Regulation T?

Regulation T is a Federal Reserve rule governing margin trading. It sets the initial margin requirement — currently 50% for marginable stocks — so when you buy on margin you must put in at least half the purchase price at the time of the trade. Miss that deposit within the Reg T payment period and a margin call is issued.

What is the minimum to open a margin account?

FINRA requires at least $2,000 in equity before you trade on margin. If the securities you want cost less than $2,000, you simply pay 100% — you’re never required to deposit more than the full price. Some brokers set a higher bar, but $2,000 is the FINRA minimum.

What does hypothecation mean?

Hypothecation is pledging your securities as collateral for a loan — here, the margin loan. When you open the account you sign a hypothecation agreement letting the broker hold your securities as security for the loan. Like a mortgage on a house, you keep ownership but the lender has a lien if you default.

What happens in a margin call?

Your equity has fallen below the maintenance requirement (FINRA’s 25% for a long position), so the broker demands more cash or marginable securities. If you can’t meet the call, the broker can immediately sell securities in your account to restore the equity — without notifying you first, and potentially selling more than the position that caused the call. You still owe any remaining loan balance.

Can you buy options or mutual funds on margin?

Generally no. Long options (calls or puts) must be paid for in full — there’s no borrowing against them. Newly purchased mutual fund shares can’t be margined either; industry rules require holding them roughly 30 days before they can be pledged as collateral. The same holds for new-issue IPOs. After the holding period, fully paid fund shares can serve as collateral.

One line to carry in: cash = pay in full, risk only your money; margin = borrow at Reg T 50%, keep 25% maintenance, and the broker can sell your collateral without asking. Nail Reg T vs FINRA and you’ve got most of the margin questions on the SIE.