Brokerage cash account definition
Every month, individual investors across the country receive brokerage account statements. Many brokerage cash account definition find it difficult to understand the information contained in the statements and after a quick review of their account values never look at their statements again. In fact, some brokerage firms take the position that an investor is bound by the information reflected on a statement if he does not object to errors or inaccuracies within 10 days of the date the statement is received.
The discussion below is designed to help you understand how a brokerage account statement is organized and what it does and does not tell an investor about his account. Any investor who has done business with more than one brokerage firm knows that no two brokerage brokerage cash account definition look alike. He also knows that statements are rarely easy to understand. Regardless of the firm, however, all brokerage account statements are understandable if an investor realizes that an account statement is nothing more than a simple accounting format that utilizes debits and credits:.
Any changes to the value of an account, aside from increases or decreases in the value of securities in an account, can be understood by analyzing the debit and credit entries brokerage cash account definition appear in the statement. Many times it is easier to understand what is happening in an account by following how money flows through the account. The various formats and terms utilized in account statements are not as difficult to understand as they might initially appear.
Many investors fail to realize that what may seem to be a foreign language is usually translated on the reverse side of each statement page. This is where many of the terms and codes that are used in the statement are defined and explained. Most investors never realize that there are different sections of an account within their main account. The number codes are explained on the back of the monthly statement. These codes vary from firm brokerage cash account definition firm.
Before even beginning to look at what has happened in an account, an investor should carefully read all the information here. While brokerage firms present the information contained in an account statement in a variety of formats, it can be grouped into five basic sections.
All of these sections are interrelated. The information reflected in the last four sections provides the underlying detail for the information reflected in the summary section. By reviewing the activity and information described in the income, charges, account activity, and portfolio positions sections, an investor can understand any changes to the value of an brokerage cash account definition that appear in the summary section of the statement. The summary section on the front page of the account statement is designed to answer this question.
This section tells the investor the value of the account as of the closing date of the brokerage cash account definition. Most summary sections show the opening and closing values of the account for the month. A quick comparison of these two values indicates whether an account has gone up and down in value. If a summary section only gives an account value as of the closing date of the statement, an investor must compare that value to the account value reflected on the previous account statement to determine if the account value has gone up or down.
The summary section also reflects the total income and charges to the account for the previous month. The summary section is just the starting point for evaluating what has happened during the previous month. No investor should brokerage cash account definition rely on this information alone, because it does not explain why the value of the account has changed.
Some brokerage firms combine brokerage cash account definition sections with the account activity section of the statement, while others present them separately. These sections reflect what earnings or income have been received into an account and what funds or charges have been paid out of an account during the previous month. Some common entries that appear in these sections include the receipt of dividends, the receipt of interest, the payment of checks against the account, and the payment of credit card charges.
It is important to review these sections because an increase or decrease in account value can be the result of income or charges reflected in these sections rather than a change in the value of the securities in the account. For example, if bond interest is received into an account, the value can go up. In order brokerage cash account definition be sure of the real reason for a change in value to a brokerage account, an investor must balance the income and charges to their brokerage account the same way he would balance a checking account.
If this is not done, then an investor cannot be sure that he understands why changes to the value of an account have occurred. Reviewing these sections is also important to make sure that no errors have occurred that brokerage cash account definition affect the value of an account.
More specifically, all dividends and interest earned from investments in the account should be shown in the income section as being credited to the account. An investor should review the income section to make sure that interest and dividends brokerage cash account definition being received.
Additionally, any checks paid out of the account or credit card charges to the account should be shown in the charges section. An investor should check this section to make sure that the proper amount of funds are being withdrawn from the account. An investor who does not review this section is blindly relying on the brokerage firm to ensure that all credits to and charges against the account have been processed correctly. Although a return of principal does come to an investor in the brokerage cash account definition of cash, it is not income or yield from the original investment; instead, it is a return of a portion of that original investment.
The value of the original investment is usually diminished by such a return of principal. The account activity section of a statement is both the most important and most confusing section of an account statement. All activity that has occurred in an account as of the closing date of the statement is listed in this section.
The most common entries appearing in this section include: The dates of security transactions are reflected as settlement dates and not the actual dates the trades were ordered. Therefore, security orders that have brokerage cash account definition executed brokerage cash account definition the closing date of the statement brokerage cash account definition have not yet settled do not show up on the statement until the following month. With rare exceptions, the entries that appear in this section will have an impact on the overall value of the account.
For example, if the statement reflects a security purchase and the price of the security changes by the end of the statement period, there will be an unrealized gain or loss that impacts the value of the account.
If there is a sale of a security during the statement period, then a realized profit or loss will occur in the account and the value will change. If a security is journaled into or out of the account, the value of the account will go up or down. Whatever activity occurs in the account, an investor must carefully review this section of his account statement or it will be impossible to determine why the value of the account has changed.
A careful review of this section of an account statement can reveal problems such as unauthorized use of margin, unauthorized trading or excessive trading. Some examples of such abuse are set out below. Journal transactions are bookkeeping entries that affect the movement of money and securities.
It is not uncommon for journal activity to occur in an account for a number of legitimate reasons. Journal transactions may reflect the movement of money or securities from one brokerage account to another.
When the stock market crashed in Octobersome investors learned for the first time that their portfolios had been leveraged through the use brokerage cash account definition margin. If these investors had reviewed the activity section of their statements, they could have detected the problem earlier. In some instances, the unauthorized use of margin was accomplished by journaling securities that were already in an account from the cash portion of the account to the margin portion of the account.
The cash account is the portion of the account where trades are conducted on a cash basis and must be fully paid for by the settlement date. No credit is involved with the cash account. In the margin account, trades are done on the basis of credit extended by the brokerage firm to the customer. Here, money is loaned, and interest is charged, to the customer to effect transactions.
The brokerage firm holds the securities as collateral for the loan. The interest rate is shown on the activity statement brokerage cash account definition interest percentage charged on the loaned amount. Also shown is the period of time for which interest is being charged on the loaned amount.
A quick review of the account for these margin interest charges can alert an investor if his account is being leveraged without his permission. Unauthorized trading can also be detected by reviewing this section.
By simply looking at the security transactions that are reflected in this section, an investor will know if an unauthorized transaction has taken place in the account. Excessive trading can also be reflected in this section. Since the average investor looks at his account brokerage cash account definition the perspective of how much money the account brokerage cash account definition making or losing, he may fail to focus on the raw number of trades brokerage cash account definition in the account.
However, the account activity section gives the investor a complete picture of all security transactions made in the account for the previous month. By reviewing this section for a brokerage cash account definition of months, an investor begins to realize the magnitude of trading in his account and can ask himself if the level of activity is really appropriate for him.
If a brokerage account does not have any activity in the income or charges brokerage cash account definition or in the account activity section, any changes in account value should be explained in the final section — the portfolio positions. This section should be a listing of which securities are in the account, which securities have been sold short, and what the portfolio is worth as of the closing date of the statement.
Many firms break this section down by the brokerage cash account definition of security i. For each position in the account, this section lists the name of the security, number of shares, price per share, anticipated income from the investment, and market value of the position.
Some securities that are in an account can be reflected in this section as being unpriced. If unpriced securities are in this section, a market value for these securities must be obtained before you can determine the real value of the account.
The portfolio positions section also reflects whether a position is being held in the cash or margin portion of brokerage cash account definition account. An investor will sometimes look at the brokerage cash account definition value that appears in this section and view this as a true indicator of what his account is worth. In the case of a pure cash account with liquid securities, the portfolio value plus the value of any money market funds in the account should equal the net worth.
If no other activity has brokerage cash account definition in an account during the statement period and the value of the account has still changed, an investor should be able to conclude that the change in value is due to a price change in one or more of the positions in the account. Tracking funds and securities through a brokerage account and balancing debit and credit entries ensures that the mechanical additions and subtractions are being done correctly and account value is not being adversely impacted by errors.
However, there are some problem areas brokerage cash account definition exist in account statements to which investors should be sensitive. When an investor looks at the value of his account each month, he assumes that this figure roughly reflects the amount of cash he would receive if he were to liquidate his account. However, depending on what type of brokerage cash account definition are in an account, this is not always true. Upon trying to liquidate these partnership investments, many investors who have not closely examined their account statements brokerage cash account definition out that the true value of their accounts is nowhere close to what they thought it was.
Another problem area investors should be aware of concerns the use of journal transactions to move securities between the cash and margin portion of a brokerage account.
As brokerage cash account definition earlier, when securities are journaled from the cash portion of an account to the margin portion of an account, an account can become leveraged because the securities in the account can then be used as collateral for margin purchases. In the past, this type of intra-account journal would be reflected in the account activity section of a statement. Brokerage cash account definition, these statements make it more difficult for an investor to realize that securities have been transferred from the cash portion of an account to the margin portion of an account.
Other problems that exist with account statements are related to the information that brokerage firms have brokerage cash account definition to them but choose brokerage cash account definition to include on an account statement.
While commission information for specific transactions is usually provided on confirmations the investor receives, the investor is never provided with a compilation of commission activity for his account. With this information so easily on hand, one can only conclude that brokerage firms do not want an investor focusing on how much he is paying the firm. Another area where most statements could provide information, but do not, relates the profitability of open brokerage cash account definition closed security positions.
One of the most important pieces of information to any investor is whether he has made a profit or incurred a loss.
Check out the registration status and background of any firm or financial professional you are considering dealing with. You can do this through the Financial Industry Regulatory Brokerage cash account definition BrokerCheck website and the National Futures Association Background Affiliation Status Information Center. Take a look at the CFTCs RED List, which contains the names of unregistered foreign entities that CFTC has reason to believe are soliciting and accepting funds from U.
residents at a retail level for, among other things, brokerage cash account definition options. Finally, dont invest in something you dont understand.
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