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When opening a brokerage account to trade stocks and such, you’ve got to decide whether you want a margin account or a cash account. They sound similar, but some key differences impact your trading strategies, risks, and costs. Let’s break it down so you can determine which suits your investing style.
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An Overview of Margin Account
A margin account essentially loans you money from the brokerage to buy more stocks than you’d normally be able to pay for upfront. This is known as “buying on margin,” which is not to be confused with dim sum pork buns, which are also delicious. To effectively manage and assess the potential costs and returns of buying on margin, you can also use a margin trading calculator.
Benefits of Margin Accounts
1. A margin account allows you to borrow money from your broker to buy more stocks. This gives you more buying power to invest.
2. You can buy more stocks when the market dips than the available cash. This allows you to take advantage of low prices.
3. With a margin loan, you don’t have to sell your investments to access more cash for opportunities. You can borrow against your portfolio value.
4. A margin account also allows you to sell stocks short. This gives you a way to profit when stocks decline.
5. You can tailor the loan amount per your market outlook and investing needs. This provides more flexibility and control.
An Overview of Cash Account
A cash account is your wallet but for stocks instead of cash. It’s a brokerage account that allows you to buy and sell stocks, similar to a regular investing account. The key difference is that with a cash account, you must pay for your stock purchases in full upfront with the cash you have deposited. You can’t buy stocks “on margin” like you can with other brokerage accounts.
Benefits of Cash Account
1. You avoid paying interest and fees that you would owe on a margin account
2. There’s no chance of getting a “margin call” – that’s when the broker forces you to add more cash or sell stocks because your account value dropped too low
3. Beginner investors tend to get themselves in less trouble and lose less money using a cash account
4. Your risk is limited to the amount of cash you choose to put into the account
5. You can easily track how much cash you have available to trade or withdraw at any time
Differences between Margin Account VS Cash Account
| Feature | Margin Account | Cash Account |
| Buying Power | Higher via access to broker loans | Limited to your own cash |
| Risk Profile | Highly leveraged, higher loss potential | Lower risk capped at cash invested |
| Extra Fees | Interest on outstanding margin debts | None |
| Tradable Assets | All securities, including short positions | Long positions only |
Conclusion
Margin trading accounts allow you to borrow money from your broker to buy more stocks, but you run the risk of margin calls if prices drop. Cash accounts don’t allow borrowing, so you can only buy stocks with the cash you deposit, but there’s no margin call risk. Ultimately, margin accounts provide more buying power, while cash accounts offer simpler, safer investing.
