Margin Account vs Cash Account - The Difference

Margin Account vs Cash Account - The Difference

Once you decide on starting trading, opening your broker account will be one of the initial steps. You will be provided with a couple of choices after selecting your broker: margin account vs cash account. In the following paragraphs, we have mentioned the differences between margin accounts and cash accounts which will come of use to you.

Cash accounts

These types of accounts are quite simple. It will be possible to trade only with the cash you have on account and nothing can be borrowed from the broker. Although a cash account will prevent you from suffering significant trading losses, you will not have much purchasing power.

Moreover, in case you are restricted by the pattern day trader regulation, this rule will not include cash accounts. If there is less than $25,000 in your account, you will be able to day trade using a cash account since you will not be using margin but your cash.

Nevertheless, it will be imperative for you to wait until your money has settled before placing trades, and you need to wait for trades to settle before withdrawing any money that was made by you with sold shares.

Apart from this, cash accounts aren't entitled to short stocks, and it will not be possible to lend out the stocks held by you to short sellers.

Margin accounts

Unlike cash accounts, margin accounts will enable you to borrow cash from the broker thus enhancing your purchasing power. Nevertheless, there is no additional requirement for opening up a margin account since your broker is going to lend cash. It will also be required for you to pay a fee because of using margin.

As much as 50% of your purchase can be on margin which will depend on your account size as well as your broker. However, there is no need to use as much as 50% in all cases. You might do even 30% or 10% of the borrowed money.

In case there is $10,000 in your account and you'd like to use the entire 50% margin, you will be having a purchasing power of $20,000.

In addition to this, your shares might be lent out by your broker to short sellers.

Although using margin can prove to be somewhat risky while you are trading, it will help to increase your purchasing power.

Margin maintenance

It is important to maintain margin accounts which is the least amount of equity that must be in your account. One can define equity as your holdings' value minus the cash that you owe to your broker.

You will be issued a margin call by your brokerage once the equity becomes less than the minimum requirement, and in this case, you have to add more securities or cash within a specific date. Your holdings might likewise be sold by your broker without notice.

On most occasions, you will be allowed to short stocks by margin accounts. Short selling is actually the technique where you will be borrowing shares, selling them, and then hopefully buying them back to return at a lesser price.

How to open a margin account

There several requirements for opening a margin account. First, you need to deposit a minimum amount of $2000 while some brokers might require even more. Apart from this, it will also be imperative to allow the broker to perform a credit check while opening the account and provide information regarding your assets and income.

When can I receive interest on the cash account?

Interest is going to be accrued regularly, compounded every month, and credited quarterly into your cash account.

What can be done with my cash account?

In case there are adequate funds in your cash account, it will be possible to use the cash for paying for all your investments, market data services, and fees.

How frequently will it be possible to make day trades in the margin account?

Margin accounts will enable you to make day trades without any sort of restriction or they are going to be restricted to a maximum of 3-day trades within any period of 5 consecutive business days.

Conclusion

The choice of a margin account or cash account is an important decision to make. It is going to impact your purchasing power, how frequently you will be able to day trade, and so on. Devote some time to consider the advantages and drawbacks and also which one will be ideal for you in the long run.