General Securities Representative (Series 7) Practice Exam

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.