Cash account vs margin account: differences, risks, and which is better for you

A cash account limits you to deposited funds only, while a margin account lets you borrow from brokers to amplify buying power and potential losses. This guide covers how each account type works, the core trade-offs between safety and leverage, and when each makes sense for your situation.

Cash accounts: trading with money you actually have

A cash account is the simplest type of brokerage account where purchases are limited to fully available funds. No borrowing allowed, which means your buying power equals exactly what you've deposited and what's fully settled.

How cash accounts work

When you place a trade in a cash account, your broker verifies sufficient settled cash exists before executing the order. Most standard U.S. stock trades now operate on a T+1 settlement cycle, meaning one business day after trade execution. The transaction officially settles the next business day, and attempting to use unsettled proceeds for new purchases before settlement completes triggers violations that can restrict your trading.

Good faith violations occur when you buy with unsettled funds and sell before those funds settle. Accumulate enough of these violations within a year and brokers typically impose cash-only restrictions. Freeriding violations are more severe and happen when you buy securities without sufficient funds and sell them before paying for the purchase. A single freeriding violation triggers an immediate 90-day restriction with no warnings.

Benefits of cash accounts

Cash accounts provide several protective advantages worth understanding:

• Debt risk elimination: You can never owe money to your broker regardless of how badly positions perform. Your losses stay capped at what you invested, which matters when markets get volatile.
• Complete exit control: Your broker can't force you out of positions at the worst possible moment. This autonomy over exit timing lets you hold through significant market volatility without worrying about forced liquidation.
• Pattern day trading exemption: Cash accounts are exempt from PDT rules, so you can execute unlimited day trades regardless of account size as long as you're trading with fully settled funds.

These protections make cash accounts ideal for investors who prioritize control and want to eliminate any possibility of owing money beyond their initial investment. The trade-off comes in the form of operational constraints.

Drawbacks of cash accounts

The main limitations you'll encounter:

• Settlement waiting periods: The T+1 settlement cycle means selling stock on Monday leaves those proceeds unsettled until Wednesday. You're waiting for funds to settle before reinvesting, and attempting to use unsettled proceeds triggers violations.
• No borrowing allowed: You can't amplify returns with borrowed funds. For investors who want higher market exposure with 2:1 buying power, this matters.
• Limited options strategies: Cash accounts restrict you to covered calls and cash-secured puts. Multi-leg strategies like credit spreads and iron condors require margin accounts, and short selling isn't available due to the borrowing mechanism involved.

For investors willing to take on additional complexity and risk in exchange for more flexibility and leverage, margin accounts offer a different set of capabilities.

Margin accounts: borrowing to trade (and the risks that come with it)

The concept sounds simple, but the execution has consequences that can surprise even experienced investors. A margin account allows you to borrow money from your broker to purchase securities, using your account as collateral. Under Federal Reserve Regulation T, you can borrow up to 50% of the purchase price of margin securities.

How margin accounts work

Your equity equals the total value of securities minus what you owe the brokerage. Under Regulation T, you can borrow up to 50% of the purchase price:

• The mechanics: Purchase a $20,000 position with $10,000 of your capital and borrow $10,000 from your broker at interest rates that vary by brokerage.
• When prices rise: If the position rises to $25,000, your equity increases from $10,000 to $15,000 after subtracting the loan.
• When prices fall: If the position drops to $15,000, your equity falls to $5,000. Once equity falls below the maintenance margin requirement (typically 25-40% of market value), a margin call is triggered.

Federal regulations allow 2:1 buying power for overnight positions. With $50,000 cash, you can control $100,000 in securities. Pattern day traders with accounts over $25,000 can access 4:1 intraday buying power.

Benefits of margin accounts

Margin accounts offer capabilities unavailable in cash accounts:

• Immediate settlement: Sale proceeds are available instantly for reinvestment without waiting periods, which matters when you need to act quickly on new opportunities.
• Advanced options strategies: You gain access to trading levels 3-4 including multi-leg spreads like iron condors and vertical spreads. These defined-risk strategies aren't available in cash accounts.
• Short selling access: You can short sell securities, though this requires borrowing and carries substantial risks with 150% margin requirements.
• Strategic flexibility: The leverage lets you access capital for new opportunities without liquidating existing positions you're holding long-term.

These capabilities provide strategic flexibility that active traders value, but they come with risks that require careful attention and management.

Risks of margin accounts

The risks in margin accounts are substantial and worth understanding before opening one:

• Losses beyond initial investment: The SEC explicitly warns that margin account holders can lose more funds than you deposit. This differs fundamentally from cash accounts where losses are capped.
• Forced liquidation without notice: Brokerage firms can sell your securities without notice when insufficient equity exists. You have no control over which securities are sold, when they're sold, or at what price. Liquidation often occurs at market bottoms when prices are worst.
• Daily interest charges: Interest charges accumulate daily on borrowed amounts regardless of whether positions are profitable. These costs compound over time and can significantly erode returns.

Understanding these risks is essential before deciding whether margin trading fits your investment approach and risk tolerance.

Cash vs. margin: the core trade-offs

This comparison makes the fundamental trade-off clear. Cash accounts provide safety and control, while margin accounts provide leverage and flexibility at the cost of significantly higher risk. Understanding these trade-offs matters, but regulations determine what's actually available to you and when.

Cash account requirements and rules

The biggest operational challenges in cash accounts come from settlement timing. Under the current U.S. T+1 settlement standard, most equity trades settle one business day after execution. Good faith violations occur when you buy with unsettled funds and sell before those funds settle, with brokers typically imposing restrictions after multiple violations. Freeriding violations happen when you buy securities without sufficient funds and sell them before paying. A single freeriding violation triggers an immediate 90-day restriction.

Margin account requirements and rules

Regulators and brokers impose multiple layers of requirements designed to protect both parties from excessive risk. FINRA requires a minimum of $2,000 to open a margin account, though individual brokers often set higher thresholds that can reach $5,000 or $10,000 depending on their risk policies.

Initial margin requirement

Regulation T lets you borrow up to 50% of what you're buying, which means you need to put up at least half in cash. To buy $10,000 worth of stock on margin, you need $5,000 equity while your broker lends the remaining $5,000.

Maintenance margin requirement

After your initial purchase, you need to maintain minimum equity levels. Regulation T requires 25% minimum, though most brokers require 30-40% or higher depending on the security and position concentration. If your $20,000 position (bought with $10,000 borrowed) drops to $14,000, your equity falls to 28.6% since you have $4,000 equity divided by $14,000 value. At a 30% maintenance requirement, you get hit with a margin call.

What is a margin call and how it works

A margin call occurs when your account equity falls below maintenance requirements. You can deposit cash, transfer securities, sell positions, or close margin positions to meet the call. The critical risk is that brokers aren't required to give you time to respond, and under most margin agreements your securities can be sold without waiting for the margin call to be met. You have no control over which securities are sold, when they're sold, or at what price.

How borrowing amplifies both gains and losses: specific examples

These percentages are abstract until you see how they play out in real scenarios.

Price increases: In a cash account, you put $10,000 in a stock that increases 20% to $12,000 for a $2,000 gain.

In a margin account with 2:1 leverage, you put $10,000 of your own money and borrow $10,000 to purchase $20,000 worth of the same stock. The stock increases 20% to $24,000, and after repaying the $10,000 loan you have $14,000, which is a $4,000 gain before interest costs.

Price decreases: In a cash account, your $10,000 investment declines 40% to $6,000. You still own the position with no margin calls, forced liquidation, or debt to your broker.

In a margin account, your $20,000 position (bought with $10,000 borrowed) declines 40% to $12,000. After repaying the $10,000 loan, you have $2,000, which is an $8,000 loss before interest. With 2:1 buying power, a 40% stock decline becomes an 80% loss of your original capital.

Borrowing amplifies both directions proportionally. With 2:1 buying power where 50% is borrowed, your percentage returns and losses double. A 15% stock gain becomes a 30% capital gain, while a 15% stock loss becomes a 30% capital loss.

Advanced trading strategies: what requires margin

The account type you choose determines which strategies are accessible.

Cash account capabilities

Cash accounts are limited to Options Levels 1-2, which include covered calls, protective puts, and cash-secured puts. Short selling isn't available in cash accounts.

Margin account requirements

Margin accounts are required for Levels 3-4 including vertical spreads and other multi-leg defined-risk strategies, naked options writing, and short selling. Even defined-risk credit spreads require margin accounts due to early assignment risk. Short selling requires 150% margin requirements.

Pattern day trading rules

Pattern day traders (four or more day trades within five business days) in margin accounts must maintain $25,000 minimum equity. Cash accounts are completely exempt from PDT rules, allowing unlimited day trades regardless of account size, though the T+1 settlement period means waiting for funds to settle before reusing proceeds.

When to choose a cash account

Cash accounts work best for long-term investors, beginners, and anyone who wants to eliminate forced liquidation risk. They eliminate debt risk and interest costs while capping losses at your initial investment. The T+1 settlement delays only matter if you're actively trading multiple times per week. If you're holding index funds for retirement and trading occasionally, cash accounts eliminate unnecessary complexity while preserving capital.

When to choose a margin account

Margin accounts are only for experienced investors with high risk tolerance who can afford to lose more than their initial investment. They provide immediate settlement, advanced options strategies, and increased buying power. You need to maintain equity buffers above minimums to avoid forced liquidation. Choose margin only if you understand that brokers can liquidate positions without notice and you have experience managing leveraged positions.

How to open an account

Opening a cash or margin account follows a similar initial process with different requirements at the approval stage.

For cash accounts, you'll choose a brokerage platform that fits your needs, complete an online application with personal information and tax details, fund your account through bank transfer or check, and receive approval that often takes one to two business days. Most brokerages require no minimum deposit for cash accounts, though some may impose minimums.

For margin accounts, the process includes the same initial steps plus additional requirements. You'll need to meet the $2,000 minimum deposit required by FINRA regulations, though many brokers set higher minimums at $5,000 or $10,000. You'll sign a margin agreement acknowledging you understand the risks of borrowing and potential for losses exceeding your investment. The brokerage will assess your suitability through questions about investment experience, financial situation, and risk tolerance. Approval generally takes several business days due to the additional review requirements.

Frequently asked questions

Can you lose more money than you invest in a margin account?

Yes. You must repay borrowed funds plus interest regardless of investment performance. Cash accounts cap your losses at initial investment.

What's the main difference between cash and margin accounts?

Cash accounts limit you to deposited funds only. Margin accounts allow you to borrow up to 50% of purchase prices, which amplifies both gains and losses while introducing debt risk and forced liquidation risk.

Which account type is better for beginners?

Cash accounts are better for beginners. They eliminate debt risk, prevent forced liquidations, and help you learn market dynamics without the added complexity of managing borrowed funds and margin requirements.

Can you maintain both a cash account and margin account?

Yes. Some brokers allow you to maintain separate cash and margin accounts simultaneously, which lets you use each for different strategies based on risk tolerance.