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

By Di Doherty
Sep. 7, 2022
Last Modified and Fact Checked on: Jan. 30, 2026

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

In the evolving landscape of investing, understanding the distinctions between margin accounts and cash accounts is crucial for both new and experienced investors. These accounts are fundamental in buying, selling, and managing stocks, and knowing their differences can significantly impact your trading strategy.

The terminology used for these accounts is quite descriptive, making it easier to grasp what sets them apart once you dive into their characteristics.

A cash account, as the name suggests, is directly tied to the amount of cash you have deposited. This means you can only purchase stocks with the funds available in your account. Conversely, a margin account enables you to leverage your investments, providing greater purchasing power—often two to three times your cash deposit.

Key Takeaways:

Margin Account Cash Account
Margin accounts allow you to borrow from the brokerage, increasing your purchasing power. Cash accounts restrict you to the amount of cash deposited, limiting your purchasing power.
Permits short selling of stocks. Does not allow short selling; only long positions are permitted.
Subject to the Pattern Day Trader (PDT) rule, limiting the number of trades per week. Not subject to the PDT rule.
Your stocks serve as collateral and cannot be lent out without your consent. You can lend out your stocks to other traders for a fee, generating additional income.

What Is a Margin Account?

A margin account is an investment account typically provided by brokerage firms and financial institutions. In this account, you take out a loan against your deposited cash, enabling a significantly higher purchasing power.

For example, if you deposit $15,000, you could potentially have access to $30,000 to $45,000 for purchasing stocks. This increased flexibility can lead to substantial gains, but it also comes with heightened risks. If your investments decline, you could end up in debt exceeding your initial investment.

Brokerages typically charge interest on the borrowed amount, and these rates are often higher than those for traditional loans. Additionally, margin accounts are governed by more stringent regulations, requiring you to maintain a certain cash balance and adhere to specific criteria set by your brokerage.

Meeting your interest payments and maintaining a sufficient balance for your maintenance margin is essential. Failure to comply can result in a “margin call,” requiring you to either deposit additional cash or liquidate your stocks.

Margin accounts can be beneficial for seasoned traders who understand market dynamics and require immediate liquidity for trading or covering short positions. However, they are not recommended for inexperienced traders due to the risk of incurring significant debt.

What Is a Cash Account?

A cash account is a more straightforward trading account. As the name implies, you can only buy stocks with the cash available in your account. This feature eliminates the risk of incurring debt since you cannot borrow funds or pay interest on loans.

Cash accounts also allow you to lend your stocks to other traders, generating income through borrowing fees. However, some brokerages may impose restrictions, such as requiring a minimum number of shares or a certain cash value before allowing stock lending.

The profitability from lending stocks will depend on market demand and the stock’s value, influenced by whether the market is bullish or bearish.

While cash accounts have fewer restrictions, they do not permit short selling, limiting your trading strategies to long positions.

Tips for Understanding Stock Trading

Like any specialized field, the stock market has its own language and terminology that can be overwhelming for newcomers. This section aims to demystify some common terms associated with cash and margin accounts.

  • Short position. This involves selling stocks you do not own, betting that their price will decline. You sell at the current price, expecting to repurchase at a lower price later.

  • Long position. Holding a stock with the expectation that its price will rise over time. While less risky overall, it can still lead to significant losses if the stock depreciates.

  • Bull market. A market characterized by rising prices and investor optimism.

  • Bear market. A market in decline, where prices are falling or expected to fall.

  • Margin Call. A demand from your brokerage to increase your cash balance if it falls below the required minimum, which may necessitate selling stocks or depositing more cash.

  • Maintenance Margin. The minimum balance that must be maintained in your margin account, varying by brokerage. For example, a 20% maintenance margin on a $20,000 account would require you to keep $4,000 in cash.

  • Initial Margin. The minimum cash required to open a margin account, dictated by regulations and the broker’s terms.

  • Minimum Margin. The initial loan amount provided in a margin account, typically around 50% of your deposited cash, expanding your purchasing power significantly.

Margin Account vs. Cash Account FAQ

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

    Your choice for day trading hinges on your trading strategy. Cash accounts do not allow short selling, limiting your options, while margin accounts are regulated by the Pattern Day Trader (PDT) rule, which restricts the number of trades you can execute within a specific timeframe.

    Executing four or more day trades within five business days can flag your account, regulating excessive trading.

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

    The borrowing limit in a margin account varies by brokerage and your initial deposit. Most allow you to borrow two to three times your initial cash deposit.

  3. Can I withdraw cash from a margin account?

    Yes, you can withdraw cash from a margin account. However, be mindful of your maintenance margin and interest obligations. Some traders treat this similarly to withdrawing cash from a credit card, using it for immediate needs and repaying later.

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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.

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