Compare Account Types - Securities Industry Essentials SIE

1. What is the difference between an American-style option and a European-style option?

   American: exercisable any time; European: exercisable only at expiration. The exercise flexibility in American options allows for strategic timing based on market conditions, unlike European options restricted to maturity.

2. What is the minimum maintenance margin requirement for long equity under FINRA rules?

   At least $25\%$ equity in the market value of the position. FINRA rules enforce this threshold to ensure sufficient equity cushions against market declines, protecting both investors and broker-dealers from excessive losses.

3. What is the minimum maintenance margin requirement for a short equity position?

   At least $30\%$ equity in the market value of the short position. This higher requirement accounts for the added risk in short positions, where rising prices can lead to greater losses, necessitating more equity to cover potential obligations.

4. What is a covered call position?

   Short call with ownership of the underlying shares. Owning the shares covers the obligation to deliver if exercised, limiting risk to opportunity cost rather than unlimited loss.

5. Which joint account registration allows unequal ownership and passes the interest by will?

   Tenants in common (TIC). This structure permits specified ownership percentages and inheritance through estate planning, providing flexibility for non-survivorship joint accounts.

6. What is the maximum loss for a buyer of an option contract (call or put)?

   The premium paid (plus commissions/fees). Buyers have no obligation beyond the initial cost, limiting downside to the premium while offering unlimited upside potential for calls.

7. Which option position gives the holder the right to sell the underlying at the strike price?

   Long put. This position offers bearish or protective strategies, enabling the holder to sell at the strike if the market falls, with risk capped at the premium.

8. What is the primary purpose of a margin account agreement signed at account opening?

   Authorizes borrowing and pledges securities as collateral to the broker-dealer. This agreement legally enables the broker to extend credit and use account assets as security, facilitating margin trading while outlining terms.

9. What is the standard settlement cycle for most broker-dealer securities transactions?

   $T+1$. This cycle, shortened to promote efficiency and reduce settlement risk, requires payment and delivery one business day after the trade date for most transactions.

10. Identify the option position with unlimited maximum loss exposure.

    Short (uncovered) call. Without owning the underlying, the seller faces unlimited risk if the market rises sharply, requiring purchase at higher prices to deliver.

11. Which option position gives the holder the right to buy the underlying at the strike price?

    Long call. This position provides bullish exposure, allowing the holder to benefit from rising underlying prices without obligation, limited to the premium paid.

12. What does the Options Disclosure Document (ODD) provide to a customer?

    Standardized risks, characteristics, and terms of listed options. Required by regulators, the ODD ensures investors understand option mechanics, risks like time decay, and volatility impacts before trading.

13. What is the tax characteristic of a traditional IRA versus a Roth IRA?

    Traditional: pretax, taxable withdrawals; Roth: after-tax, tax-free qualified withdrawals. Traditional IRAs defer taxes on contributions and growth, while Roth IRAs tax contributions upfront for tax-free growth and distributions if rules are met.

14. Identify the term for a broker-dealer demand to add funds when equity falls below maintenance.

    Maintenance margin call. This mechanism ensures accounts maintain required equity levels, prompting investors to deposit additional funds or securities to comply with regulatory standards.

15. What is the key feature that distinguishes a cash account from a margin account?

    Margin account permits borrowing against securities; cash account does not. This distinction enables leverage in margin accounts by allowing investors to borrow funds from the broker to purchase securities, amplifying both potential gains and losses.

16. Which account registration is used when two owners hold equal, undivided interests with survivorship?

    Joint tenants with right of survivorship (JTWROS). This registration ensures automatic transfer of ownership to the surviving tenant upon death, avoiding probate for equal joint holdings.

17. What is the key difference between a SEP IRA and a SIMPLE IRA for contributions?

    SEP: employer-only contributions; SIMPLE: employee deferrals plus employer contribution. SEPs suit small businesses with variable employer funding, while SIMPLEs require employee participation and mandatory employer matches or contributions.

18. What is the primary feature of a 529 plan regarding qualified withdrawals?

    Tax-free withdrawals when used for qualified education expenses. These plans promote education savings by allowing after-tax contributions to grow tax-deferred, with tax exemptions on distributions for approved costs.

19. What is the role of a trustee in a trust account registration?

    Manages trust assets for beneficiaries under the trust document. As a fiduciary, the trustee must adhere to the trust's terms, prioritizing beneficiaries' interests in asset management and distribution.

20. Identify the retirement plan that allows employer matching and employee salary deferrals.

    401(k) plan. Sponsored by employers, this defined contribution plan encourages savings through tax-deferred deferrals and potential matching to boost retirement funds.

21. What is the main difference between an individual account and a custodial (UTMA/UGMA) account?

    Custodial assets belong to the minor; custodian manages until age of majority. Custodial accounts under UTMA/UGMA are irrevocable gifts to minors, with the custodian acting in a fiduciary capacity until the minor reaches adulthood.

22. Which trust type generally cannot be changed by the grantor after it is established?

    Irrevocable trust. Once established, this trust removes assets from the grantor's estate for tax or protection purposes, preventing alterations to ensure permanence.

23. What is Regulation T initial margin requirement for buying stock in a margin account?

    Customer must deposit at least $50\%$ of the purchase price. Regulation T, established by the Federal Reserve, mandates this deposit to control credit extension and mitigate systemic risk in securities markets.

24. Which trust type can generally be changed or revoked by the grantor during life?

    Revocable (living) trust. This trust allows the grantor to retain control and flexibility, often used for estate planning to avoid probate while modifiable during lifetime.

25. What is the defining feature of a community property account registration?

    Spouses generally own assets acquired during marriage equally. In community property states, this registration reflects marital property laws, dividing assets equally regardless of title for equitable distribution.

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