Margin Account vs. Cash Account: Differences, Pros & Cons (2024)

Cash accounts are accounts in which investors deposit money and purchase securities. Margin accounts are accounts in which investors deposit money, purchase securities, while being able to borrow money against those securities.

Margin Account vs. Cash Account: Differences, Pros & Cons (1)

What Is A Margin Account?

One important benefit brokers extend to investors is to lend them money using their securities as collateral. To take advantage of this benefit, the investor must have a margin account. In such an account investors can own an amount of securities that exceeds the account value.

The broker can monitor the status of the securities and the loan balance owed by the investor. Investors can use margin account borrowing capacity to purchase additional securities or even withdraw the money from the account (with certain limitations).

Margin accounts are also used by options investors who are required to put up collateral when shorting options.

Once an investor is approved for a margin account, there are no loan applications or other paperwork to complete. Investors simply purchase securities up to a limited amount and if they purchase more than the cash available in their account, the additional funds are automatically supplied by the broker (again, up to a certain maximum).

Investors are charged interest on the borrowed money, at prevailing interest rates, similar to a loan balance. There are, however, no loan payments required, unless the value of the securities falls below a certain amount. Otherwise, the debit balance simply remains in the account (accruing interest each month) and is automatically paid back when securities are sold or new money is deposited into the account.

Margin Account Requirements

Once an investor is approved for a margin account by their broker, there are several industry-wide requirements established for all margin accounts. The basic rules include:

1. Initial Margin

When initially purchasing common stock in a margin account, an investor must put up at least 50% of the stock's purchase value. In other words, the investor is required to have at least 50% "equity" in the position. That means the investor can purchase stocks worth up to twice the value of their available cash in the account.

Note: Initial margin is not the same for all securities. An investor can purchase US Treasury Bills with only 10% equity. On the other hand, options must all be purchased with 100% cash and cannot be purchased on margin at all. Options are already leveraged securities.

2. Maintenance Margin

If securities decline in value, the investor's equity in the account is accordingly reduced. Investors must maintain at least 25% equity in all existing positions. If the value of the collateral securities in the account falls to a point where the investor's equity is less than 25%, the broker will issue a margin call requiring additional money to be deposited to bring equity up to at least 25%. Failing to immediately heed a margin call can result in the firm liquidating some or all of the collateral securities to recover its balance owed.

3. Minimum Equity

Under any conditions, investors must maintain at least $2,000 of equity in a margin account.

4. Transfers

Securities cannot be transferred out of a margin account while there is a debit balance, since they serve as collateral.

Note: The rules above are minimums set by the SEC. Brokers can implement tighter rules if they elect to but must adhere at least to these minimums. As an example, a firm might have a maintenance margin requirement of 40%, rather than the required minimum of 25%.

How Do Margin Accounts Work?

Margin accounts essentially work just like ordinary cash accounts as far as buying and selling securities are concerned, but with higher purchase limits available to the investor. An investor with $5,000 in a cash account can only buy up to $5,000 worth of stocks, but in a margin account, they could buy up to $10,000 worth of stock with only $5,000 in cash.

If you have a margin account, your purchases use available cash first and then create a debit balance for the remainder, if necessary. Margin account order screens will usually tell investors how much "buying power" they have at any particular time. That informs them of what their maximum purchase amount can be, including borrowed funds from the broker. If an investor tries to buy stock worth more than the available buying power, their brokerage firm's order system will likely flag it and disallow the trade.

Tip: Margin calls are serious business. Brokerage firms maintain strict rules about how much time you have to deposit funds (usually the same day) before they sell positions to protect their interests.

Example Of How A Margin Account Works

Below is an example of a hypothetical margin account. An investor's account equity will always equal the total value of securities and cash in the account minus any debit balance. (The figures below do not include interest charged)

Investor deposits $5,000 in cash into a margin account Investor's equity: $5,000
Equity: 100%
Debit balance: 0
Investor purchases $10,000 of stock Investor's equity: $5,000
Equity: 50%
Debit balance: $5,000
Stock value rises to $12,000 Investor's equity: $7,000
Equity: 58%
Debit balance: $5,000
Stock declines to $9,000 in value Investor's equity: $4,000
Equity: 44%
Debit balance: $5,000
Stock declines to $6,500 in value Investor's equity: $1,500
Equity: 23%
Debit balance: $5,000

(Note - interest charges were not considered in the above example)

In this last instance, the investor would receive a margin call, as the equity in the account would have fallen below 25%.

Where & How To Get A Margin Account

U.S. and Canadian brokerage firms can all be expected to offer margin accounts. It should be noted, however, that their policies, such as approval criteria, account requirements, and the interest rate charged on debit balances, may vary.

When you are signing up for a new account, you will need to specify that you are looking to open a margin account. Firms will likely have additional questions for those applying for a margin account.

What Is A Cash Account?

Cash accounts are the default type of accounts at brokerage firms. They require that all purchases of securities be fully paid for with cash and that the cash is in the account prior to purchase. Securities in a cash account cannot be put up as collateral for a loan. New investors would be best advised to begin operating with a cash account before delving into margin lending.

How Do Cash Accounts Work?

Cash accounts require a cash deposit before securities can be purchased. There is no minimum cash or equity requirement in a cash account.

Long options positions (call options and put options) are allowed in a cash account with the appropriate option approval from your broker but uncovered option-writing positions or spread positions are not allowed in a cash account.

Cash Account Example

Cash accounts are very straightforward. The account holder's equity equals the total value of securities and cash in the account and the equity percentage is always 100%. There are no debit balances in a cash account.

Where & How To Get A Cash Account

All U.S. and Canadian brokerage firms will offer cash accounts, which will require you to simply fill out an account form. Cash accounts can exist with nothing in them, though orders to purchase securities cannot be entered until there are funds in the account.

Key Differences Between Margin & Cash Accounts

Cash and margin accounts are both used to purchase and hold securities. The main difference between them is that margin accounts allow the account holder to borrow money from the broker using the securities in the account as collateral, while cash accounts only allow you to use your own money present in the account. Specific differences are shown in the table below.

Margin Account Cash Account
Requirements $2,000 minimum No minimum
Leverage Risks Yes No
Potential Returns Higher Basic
Borrow against securities in the account Yes No
Purchase options (with firm approval) Yes Yes
Sell uncovered options or spreads Yes No
Can have a debit balance Yes No

Source: Investor.Gov

Benefits Of Margin Accounts vs. Cash Accounts

Margin accounts offer investors several benefits over cash accounts:

  • Margin account holders can purchase additional securities with money borrowed from the broker
  • Margin account holders can borrow money against fully-paid-for stock in their accounts to use for external purposes
  • Loans against securities in a margin account require no loan documents or approvals
  • Investors can borrow temporarily against their account equity without needing to liquidate securities
  • Investors are not charged to maintain margin accounts and can still purchase for cash if desired

Benefits Of Cash Accounts vs. Margin Accounts

  • Cash accounts prevent investors from purchasing more stock than they can afford
  • Cash accounts prevent investors from overleveraging themselves in emotional environments

Choosing Which Is Best For You

The best type of account for you is the account that best fits your style of investing and your attitude about investing with leverage.

If you do open a margin account, there is also no obligation to purchase on margin (using borrowed capital). You can use it just as you would a cash account and simply not purchase any more stock than you have money for.

Bottom Line

Margin accounts allow investors to obtain additional leverage and liquidity by using borrowed funds from their broker to purchase securities. If used, that leverage magnifies profit potential as well as loss potential and should be carefully considered.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Margin Account vs. Cash Account: Differences, Pros & Cons (2024)


Margin Account vs. Cash Account: Differences, Pros & Cons? ›

Cash and margin accounts are both used to purchase and hold securities. The main difference between them is that margin accounts allow the account holder to borrow money from the broker using the securities in the account as collateral, while cash accounts only allow you to use your own money present in the account.

What are the pros and cons of cash vs margin account? ›

A cash account is better for beginners and passive investors looking for simple trading of securities like stocks, ETFs, bonds, and more. More advanced investors with higher risk tolerances may benefit from the potential greater returns and increased leverage from a margin account.

What are the disadvantages of a margin account? ›

Margin borrowing comes with all the hazards that accompany any type of debt — including interest payments and reduced flexibility for future income. The primary dangers of trading on margin are leverage risk and margin call risk.

What is the danger of margin account? ›

You can lose more funds than you deposit in the margin account. A decline in the value of securities that are purchased on margin may require you to deposit additional funds to avoid the forced sale of those securities or other securities or assets in your account(s).

Should a beginner use a margin account? ›

A margin exposes investors to additional risks and is not advisable for beginner investors, and margins can be a useful tool for experienced investors, though if you're new to investing, it might be more prudent to play it safe.

Can I day trade with a cash account? ›

Defining a day trade

Pattern day trading restrictions don't apply to cash accounts, they only apply to margin accounts and IRA limited margin accounts. This means you can trade stocks, ETPs, and options in a cash account without worrying about your number of day trades.

Can you withdraw margin money? ›

Yes! Using your debit card to make purchases works similarly to withdrawing money from your individual investment account. If you turn on Margin withdrawal, you can use margin for day-to-day spending too.

What happens if you lose money on a margin account? ›

If an account loses too much money due to underperforming investments, the broker will issue a margin call, demanding that you deposit more funds or sell off some or all of the holdings in your account to pay down the margin loan.

What are the cons of a cash account? ›

Drawbacks of a Cash Account

The biggest drawback to cash accounts for traders is that after making a transaction in a cash account, the cash used must go through a settlement period, which is two days after the trade date. For example, you use $1,000 of that to make a day trade on Monday.

Why would you want a margin account? ›

When buying securities, the investor must deposit cash to settle the trade, or sell an existing position on the same trading day, so that cash proceeds are available to settle the buy order. A margin account allows an investor to borrow against the value of the assets in the account to buy new positions or sell short.

Does a margin account affect credit score? ›

If you open a margin account, the lender may run a hard inquiry — this will temporarily decrease your credit score.

Can you use your own money in a margin account? ›

For example, if you had $5,000 cash in a margin-approved brokerage account, you could buy up to $10,000 worth of marginable stock: You would use your cash to buy the first $5,000 worth, and your brokerage firm would lend you another $5,000 for the rest, with the marginable stock you purchased serving as collateral.

How do you avoid interest on a margin account? ›

How do I avoid paying Margin Interest? If you don't want to pay margin interest on your trades, you must completely pay for the trades prior to settlement. If you need to withdraw funds, make sure the cash is available for withdrawal without a margin loan to avoid interest.

Is margin better than cash? ›

Margin accounts let you borrow funds from your brokerage to supplement your investment capital. This leverage magnifies your buying power, enabling you to acquire more securities than you could with cash alone. This is enticing for those who are comfortable taking on larger positions sizes and increased risk.

Can you switch from a cash account to a margin account? ›

Cash accounts can upgrade to a Margin account. To upgrade to a Portfolio Margin account, you must be approved to trade options and your account must have at least USD 110,000 (or USD equivalent) in Net Liquidation Value.

Who is a margin account best suited to? ›

The investor has the potential to lose more money than the funds deposited in the account. For these reasons, a margin account is only suitable for a sophisticated investor with a thorough understanding of the additional investment risks and requirements of trading with margin.

When comparing a margin account to a cash account? ›

With a cash account, you could buy up to 50 shares. A margin account may allow you to buy up to 100 shares worth $10,000, meaning you'd owe the broker $5,000. Since the broker is loaning you money, it will charge you interest on the amount you borrow.

What are the advantages and disadvantages of margin? ›

Margin trading can help boost returns but on the other hand, it magnifies losses as well. It can lead to the loss of the entire invested capital as well. Investor needs to maintain a minimum balance in the margin trade facility account. This means a portion of their capital is always locked in.

What is the disadvantage of margin loan? ›

In a margin account, your positions will usually be more sensitive to day-to-day market fluctuations, and if there is a really sharp decline, you could end up losing more than the total value of your account.

Can I use my margin account like a cash account? ›

Cash and margin accounts are both used to purchase and hold securities. The main difference between them is that margin accounts allow the account holder to borrow money from the broker using the securities in the account as collateral, while cash accounts only allow you to use your own money present in the account.

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