Canadian Securities Course (CSC) Level 1 Practice Exam

What is the difference between a cash and margin account?

1. Cash accounts require partial payment, margin accounts full payment

2. Margin accounts involve loan payments, cash accounts don't

3. Cash accounts demand margin calls

4. Cash accounts require full payment on settlement date

The correct answer is: Cash accounts require full payment on settlement date

The concept of cash and margin accounts is fundamental in understanding how different types of investment accounts operate, particularly with respect to payment methods and borrowing. In a cash account, the investor is required to pay the full amount for the securities purchased by the settlement date. This means that any securities bought must be entirely paid for with the investor's own funds at the time of the transaction. This structure ensures that the investor does not incur debt relating to the purchase of securities, promoting a more cautious approach to investing. In contrast, margin accounts allow investors to borrow funds from the brokerage to purchase securities. This borrowing introduces the potential for both greater gains and greater risks, as it enables investors to buy more than they could with their cash alone. However, margin accounts do not require full payment at the time of purchase, which fundamentally differentiates them from cash accounts. The other options fail to accurately describe the basic mechanics and requirements of cash and margin accounts. In essence, cash accounts necessitate that all purchases are fully paid for, reinforcing the need for careful financial management.