Final answer:
The hypothecation agreement is the document that permits a firm to pledge a customer's stocks as collateral for a margin loan. It is a standard procedure for setting up a margin account and differs from other agreements like the loan consent agreement.
Step-by-step explanation:
The account document that authorizes a firm to pledge a customer's stock as collateral when borrowing money from a broker-dealer to buy a stock is the hypothecation agreement.
When customers engage in margin trading, they essentially borrow money from their brokerage to purchase securities.
The hypothecation agreement allows the brokerage firm to use the securities bought on margin as collateral. If the customer fails to repay the loan or meet margin requirements, the firm can sell these securities to cover the loan. Signing this document is a standard procedure when setting up a margin account.
In the financial capital market, using collateral is a common practice to secure loans.
Collateral could include property or equipment that a bank can seize if the loan is not repaid. Similarly, in margin trading, the purchased securities act as collateral.
Alternatively, a customer might also sign a loan consent agreement which could allow the brokerage firm to loan out the customer's securities to others, such as short-sellers.
However, this is different from a hypothecation agreement which directly pertains to using the client's assets as collateral for a margin loan.