When you open a new brokerage account, you typically have a choice of a margin account or a cash account. While a margin account allows you to leverage borrowed funds for greater investing power, a cash account holds less risk overall. These two accounts work for different types of investors, with the right account ultimately depending on your risk tolerance and experience. These key considerations can help when comparing a cash account versus a margin account to choose the best type for your needs.
-
- Margin accounts allow you to borrow capital to increase your buying power, which can magnify potential gains and losses.
- Margin accounts are typically better suited for advanced investors due to the risk involved.
- A cash account uses funds you already have to place trades.
- While growth is more limited, there is lower risk with a cash account because you can only lose what you invest.
What are margin accounts?
A margin account uses cash borrowed from a broker-dealer so investors can use the funds to purchase securities.(1) The account serves as collateral for the borrowed cash, enabling you to trade securities such as stocks or options. Overall, a margin account allows for larger investments, but with that comes greater risk.
Pros
- Greater buying power. With more funds, you can access investment opportunities that may be out of reach due to higher price points.
- Leverage. You may receive greater gains by using borrowed funds to invest in different assets. Just be aware of the increased risk.
- Flexibility. Greater capital can provide more opportunities for diversification.
- Short-term capability. Margin accounts provide increased buying power, which can facilitate more frequent trades. However, day traders must meet a $25,000 minimum balance under the Financial Industry Regulatory Authority (FINRA) Pattern Day Trader rule to actively trade on margin.(2)
Cons
- Risk of loss. Margin trading can amplify losses if the market experiences a downturn since you’re using funds beyond your initial investment.
- May be subject to forced liquidation. If prices fall, you may need to sell your securities to cover the loss.(3)
- Fees apply. Interest and account fees usually apply.
- Broker rights. Your brokerage is able to sell some or all of your securities to settle your loan, and margin requirements can be increased at any time.
Boost your buying power with a SoFi® margin account
- Trade stocks, options, ETFs, mutual funds, alternative asset funds.
- $0 commission on stocks, ETFs and options, with no options contract fees.
- Access to a financial planner and automated investing.
- Invest, bank and borrow from a single user-friendly platform
What is a cash account?
A cash account requires the funds up front before trading, and you cannot borrow funds from your broker.(1) However, some brokers offer limited margin in specific cases, such as for options trading in retirement accounts. With a cash account, you can trade a wide variety of investment types, including stocks, bonds, mutual funds, index funds, exchange-traded funds (ETFs) and, in some cases, cryptocurrency.
Pros
- Straightforward. Cash accounts are beginner-friendly because they do not involve borrowing, making them simpler to manage and maintain.
- Avoids debt. A cash account doesn’t allow borrowing, eliminating the risk of margin debt.
- Buy-and-hold. This type of account allows you to hold your positions regardless of market activity, giving you more flexibility in managing your investments.
- Lower risk. Because you can’t borrow funds, cash accounts limit your losses to what you put into the account.
Cons
- Upfront funds required. A cash account does not involve borrowing, so you must have the cash on hand to place trades. However, settlement rules require that funds from a sale fully clear before you can use them again for new trades.
- Limited trades. With a cash account, you cannot short sell or trade futures and certain options — such as selling calls or puts — usually require a margin account.(4)
- Limited buying power. Without leverage, your buying power is limited by the amount of cash you have.
- Potential delays. If you want to place a trade that is out of budget, you must deposit more cash or wait for previous trades to settle before placing new orders.
Simplify Your Investments with a Public Cash Account
- Trade stocks, ETFs and options commission-free
- Earn rebates on options
- Lock in a 6.8% yield with a Bond Account
- Earn 4.1% APY with a High-Yield Cash Account
Margin accounts vs. cash accounts: Which is better?
Both margin accounts and cash accounts can be valuable tools for investors, but there are some cases where one might be better than the other. When comparing a margin account versus a cash account, these are some key considerations to help you determine which one is best for you.
- A margin account is better for leveraging larger positions. With a margin account, you can borrow funds to increase your purchasing power.
- A margin account is better for day trading flexibility. Day traders can take advantage of market changes in real time when they have access to the funds they need for short-term trading.
- A margin account is better if you want short-selling capabilities. A margin account is necessary for short-selling because it allows you to borrow shares from your broker.
- A cash account is better for lower risk. With a cash account, you do not have to worry about repaying a loan because you are using the funds you already have.
- A cash account is better for no interest charges. Since there is no loan, a cash account skips the interest charges and saves you money on your investment.
- A cash account is better for simplicity and new traders. A cash account deals in funds you have, so it is more approachable for beginners who are just learning how to invest.
Compare brokerage platforms
What is the Finder Score?
The Finder Score crunches 147 key metrics we collected directly from 18+ brokers and assessed each provider’s performance based on nine different categories, weighing each metric based on the expertise and insights of Finder’s investment experts. We then scored and ranked each provider to determine the best brokerage accounts.
We update our best picks as products change, disappear or emerge in the market. We also regularly review and revise our selections to ensure our best provider lists reflect the most competitive available.
Read the full Finder Score breakdown
Bottom line
Deciding between a cash account and a margin account depends on factors like your investment goals, financial standing and experience level. While a cash account lowers your risk, margin accounts allow you to potentially grow your investments faster with borrowed capital.
To get started, compare the best brokerage accounts to find one best suited to your investment goals.
Frequently asked questions
Can I switch from a cash account to a margin account?
Yes, many brokers, like Interactive Brokers, allow you to switch from a cash account to a margin account so you can invest at your own pace.(5)
Can you have both a cash account and a margin account?
It depends on your brokerage, but most will allow you to have both a cash account and a margin account at the same time, so you do not have to choose between the two.(1)
