General Securities Representative (Series 7) Practice Exam

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Which of the following is NOT a type of contract that can be bought in a cash account?

Mutual funds
IPOs
Options that are margin-eligible
Securities traded OTC

The correct answer is: Options that are margin-eligible

In a cash account, certain types of securities can be bought and sold, but there are restrictions on purchasing specific contracts. Mutual funds, IPOs, and securities traded over-the-counter (OTC) are all permissible for purchases within a cash account. Mutual funds are normally purchased for their liquidity and the ability to buy at the net asset value (NAV) at the end of the trading day, making them suitable for cash accounts. IPOs, or initial public offerings, can also be bought in cash accounts as they are often issued to retail investors during the initial offerings. Securities traded OTC are generally done through dealer networks rather than on formal exchanges, and they can be included in a cash account as well, providing that the investor has sufficient cash to cover the purchase immediately. However, options that are margin-eligible are not suitable for cash accounts because they typically involve the use of margin—borrowed funds to purchase the options— which is not allowed in cash accounts. Cash accounts require that all transactions be fully paid for with available cash, so the ability to exercise leverage or margin is inherently restricted, making it impossible to buy margin-eligible options in a cash account.