What a cash account is
A cash account lets you buy investments only with money you have already deposited. When you place an order, the cost must be covered by the cash in your account. You cannot spend more than that amount, and you do not owe the broker money for the trades themselves. Many people starting out begin here because the rules stay simple and the amount at risk stays within what they deposited.
What a margin account is
A margin account lets you borrow money from your broker to buy investments. The loan is secured, meaning the investments in the account act as backing for it, and the broker can sell them if their value falls too far. This borrowing is called margin, and it lets you hold more in total than your deposited cash alone would allow. Margin accounts also make some strategies possible, such as short selling, where you borrow shares to sell them and hope to buy them back later at a lower price.
Borrowing is the real dividing line
The deciding difference is whether you can borrow. A cash account uses only your own money, so the amount you can lose on a purchase is normally limited to what you deposited. With a margin account, borrowed money is added, so a fall in value can leave you owing more than you put in. Almost everything else follows from that single point, so keep it in mind when you read any broker's terms.
How settlement and borrowing work in concept
Settlement is the process that moves money and ownership after a trade. Each market sets its own settlement window, and the exact length varies by market and by provider. In a cash account, the money from a sale generally cannot be used to buy something new until that sale has settled. A margin account often lets you use the proceeds sooner, but the broker sets those terms.
Borrowing adds a risk called a margin call, which cash accounts do not face. A margin call is a demand from the broker to add funds or sell holdings when the account value falls below the level the broker requires. Margin rules and the cost of borrowing differ between providers and between countries. Read about the margin rate and the terms your broker publishes, or check with your local financial authority before you borrow.
When a cash account wins
A cash account suits people who want simple rules and a clear limit on what they can lose. It works well for a person who invests regular amounts from income and does not need to borrow. A beginner who is still learning how orders and prices behave may also prefer it before adding any extra risk.
- You want to avoid owing money to your broker.
- You invest a steady amount from income each month.
- You are still learning how orders, prices and settlement behave.
When a margin account wins
A margin account can suit an experienced investor who understands borrowing and can cover losses from savings outside the account. It may also suit a person who needs short selling or a strategy the cash account does not allow. Even then, borrowed money should never be an amount you cannot afford to lose, and the margin terms should be read carefully before you start. Before you open one, read this guide to choosing a margin account.
- You understand how a margin call works and what the margin rate costs.
- You have savings ready to cover a fall in value.
- You need short selling, which a cash account does not allow.
Which to pick
Choose a cash account if you are new, or if you want the simplest rules. Move to a margin account only after you have used a cash account for a while and understand the borrowing terms. Match your choice to your situation.
- You are starting out and save a steady amount: a cash account.
- You have no spare savings to cover losses: a cash account.
- You have traded for some time and want short selling: look at a margin account after reading its terms.
- You are comparing providers: start with beginner-friendly brokers and check each account type.