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When you open a brokerage account, one of your first decisions is choosing between a cash account and a margin account. While both are brokerage accounts used to purchase securities, they work in fundamentally different ways. The distinction affects not only what you can do with your money, but also what minimum account balances and regulatory rules apply to you.
A cash account is a type of brokerage account in which you must pay the full amount for securities purchased, and you cannot borrow funds from your broker-dealer to pay for transactions in the account. In practice, a cash account is a type of non-registered brokerage account that lets you buy and sell securities using only the money you deposit. If you deposit $5,000, you can buy up to $5,000 worth of stocks. When that money settles (typically within three days), you can use it again.
A margin account is a type of brokerage account in which your broker-dealer lends you cash, using the account as collateral, to purchase securities. Margin accounts are investment accounts that let you borrow funds from your brokerage. The brokerage uses the assets in the account as collateral for the loan, and you pay interest on the amount borrowed. This borrowed money is what gives margin accounts their extra buying power—but also their extra risk.
The key advantage of a margin account is leverage. Under Regulation T (Reg T), which serves to limit how much investors may borrow in a margin account, investors can only borrow up to 50% of the purchase amount of securities they want to buy. So if you deposit $5,000 into a margin account, your buying power can be up to $10,000—you use your own $5,000 and borrow $5,000 from the broker.
That sounds attractive, but trading on margin can also amplify your losses, and you can end up losing more than your initial investment. If your $10,000 worth of stocks drops in value, the losses compound faster. Margin accounts also carry maintenance margin requirements—a certain amount you must hold in your account as collateral both before and after purchasing securities. If your account value falls below this minimum, your broker can force you to deposit more money or sell positions.
Each broker may have a different minimum, but the Financial Industry Regulatory Authority (FINRA) requires investors to have either $2,000 or 100% of the purchase amount of any securities the investor wants to buy on margin, whichever amount is lower. Cash accounts typically have lower or no minimum deposit requirement, depending on the broker.
Margin accounts also come with interest costs. Since your broker is lending you money, with your account as collateral, there are additional requirements to opening up a margin account. You also will likely have to pay a fee for using margin. These financing charges are calculated daily and vary by broker.
Certain trading activities require a margin account. Certain products like futures and strategies like multi-leg options spreads require a margin account. Additionally, cash accounts can not be used for shorting stocks, nor can your shares be lent to short sellers with a cash account.
In contrast, in a margin account, your broker may lend out your shares to short sellers. This can generate extra income for your account, but it means your shares are being used for lending activity beyond your control.
For most new investors, cash account investors have the peace of mind that comes from knowing they can't lose more than their initial investment. For instance, if you deposit $1,000, you can only use and lose up to $1,000. That simplicity and limited downside are powerful for learning the basics without catastrophic risk exposure.
Margin accounts suit experienced traders who understand leverage, closely monitor their positions, and need access to short selling or advanced strategies. But they require discipline and a solid grasp of how borrowed money amplifies both gains and losses. Many brokers will ask about your trading experience before approving a margin account request.
Analysis, not investment advice.
