Margin Account Vs. Cash Account: What’s The Difference?

Both margin accounts and cash accounts are types of accounts used by investors. They both are used for buying, selling, and lending stocks. If you’re planning to get into investing, then it’s important to understand the differences between the two.

The names of the accounts are actually quite descriptive, which makes them easy to remember once you know what differentiates them.

A cash account, as implied by the name, is based on how much cash you have in the account. That means that you can only buy stocks with the cash deposited in the account. A margin account, however, allows you to leverage your money to give you greater buying power – usually two or three times the amount of cash you put in.

Key Takeaways:

What Is a Margin Account?

A margin account is a type of investing account typically offered by investment firms and hedge funds. In a margin account, you essentially take a loan against the amount of cash you put into it, allowing you greater purchasing power.

So, for instance, if you put $15,000 into the account, you’d end up with somewhere in the $30,000 to $45,000 range to buy stocks with. This gives you a lot more flexibility in your purchasing choices, and the ability to make larger purchases – however, with that comes risk.

If things go poorly, you can end up losing more than the amount of money you started with, landing you in debt.

As with all other loans, the firm you get the account through will charge interest. The rate is usually fairly steep, being higher than that for a home equity loan. They are also subject to more rules and regulations, meaning you have to be aware of the requirements.

As a margin account is a firm giving you a loan, you’ll also have to meet certain requirements, such as having a high enough deposit and keeping enough cash in your account. This will vary from firm to firm, and some will be stricter than others.

You will also have to be able to meet your interest payments and keep a high enough balance for your maintenance margin, and failure to do so with the remaining cash in the account can lead to a “margin call,” which will force you to liquidate stock or make a deposit of cash.

Margin accounts are useful for experienced traders who are familiar with the stock market. They can also give them a quick cash injection if they need money quickly for trading or to cover a short. However, they’re also dangerous and easy to get into debt with. For that reason, they aren’t recommended for inexperienced or hobbyist traders.

What Is a Cash Account?

A cash account is a much simpler type of stock trading account. As the name suggests, you can only buy stock with the amount of cash you have in the account. Because of that, you aren’t required to pay interest on a loan, nor can you spend more money than you have and drive yourself into debt.

With a cash account, it’s also possible to lend out your stocks to other traders. There are expected borrowing fees that traders pay to the person they borrowed stocks from, meaning that it’s a way to make more profit. Some firms do have limits on this, such as needing to possess a certain number of stocks or high enough cash value in order to do this.

As with most things, the amount of value you get out of lending a stock will depend on the stock’s value, the amount of demand for it, and the behavior of the rest of the market, such as whether it’s a bull or bear market.

There are some restrictions with a cash account. Stocks can’t be shorted on a cash account, likely because you could easily end up exceeding the amount of cash deposited. However, they can also long.

Tips for Understanding Stock Trading

As with most professions, the stock market has a lot of terminology and jargon that goes along with it. If you’re unfamiliar with it, then a number of the articles you read on it will be filled with what appears to be gibberish.

This isn’t an in-depth article on stock trading by any means, but it will cover a few of the common terms in order to help you better understand cash accounts and margin accounts.

• Short position. This is the practice of selling stock that you don’t have. While that seems illogical at first glance, it’s a form of a bet. Stocks are shorted when they’re expected to fall in price. You sell the stocks at the current price – ones you don’t yet have – with the expectation that buying them later will be cheaper than buying them now.

• Long position. Longing a stock is more or less just saying that you plan to sit on it. The logic behind this is that you expect the stock price to rise in the future, but not necessarily in the near future. It’s less risky, as the stock market does overall rise over time.

  However, it can tie up funds, and if the stock crashes, that can significantly decrease your wealth.

• Bull market. This is how the market is described when prices are rising or are expected to rise.

• Bear market. This just means that the market is expected to fall or is falling.

• Margin Call. If you have a margin account, you are expected to maintain a certain amount of cash balance in it. If you fall below that level, the firm can do a margin call, requiring you to add cash to the account or liquidate your stocks in order to raise the cash amount.

• Maintenance Margin. This is the minimum amount of cash the firm will want you to keep in your margin account. It’ll vary from firm to firm, but if you’re expected to have a 20% maintenance margin on a $20,000 account, then you need to keep $4,000 in cash – of your own money – in the account.

• Initial Margin. This is the minimum amount of money you need to deposit into the margin account. Due to regulations and the fact that the firm is giving you a loan, you need to be able to show a certain amount of cash.

• Minimum Margin. This is the beginning amount of a loan you’re given in your margin account. It’s often around 50% of the cash that you put into it, giving you a lot more purchasing power. This rate can increase over time if you end up adding more money to the account, either with cash or with trades.

Margin Account vs. Cash Account FAQ

1. Should I day trade on a margin account or cash account?

   Which account you should select for day trading depends on what you plan to do. You can’t short stocks with a cash account, and your purchasing power is limited to the amount of cash you have.

   However, margin accounts are more heavily regulated, meaning that the amount of trading you can do in a period of time is limited by the Pattern Day Trader (PDT) rule.

   If you do four or more day trades in a five-business-day period, your account will be flagged. This is to prevent excessive trading, but it does limit how many trades you can do in a certain period.

2. How much can I borrow with a margin account?

   How much you can borrow with a margin account will vary depending on what firm you use and how much money you’re starting with. Most margin accounts, however, allow you up to two to three times what you initially deposited.

3. Can I withdraw cash from a margin account?

   Yes, you can withdraw cash from a margin account. However, it’s important to keep in mind your maintenance margin and your interest fees. Some traders will use this in a similar way to take out cash on a credit card – using it to cover immediate costs and then paying it back.

Author

Di Doherty

Di has been a writer for more than half her life. Most of her writing so far has been fiction, and she’s gotten short stories published in online magazines Kzine and Silver Blade, as well as a flash fiction piece in the Bookends review. Di graduated from Mary Baldwin College (now University) with a degree in Psychology and Sociology.