Cash Account vs Margin Account: Know the Differences

If you are looking to make some extra money, then playing the stock market is one of the best choices out there. But it is always going to be a proposition with some risks attached. Like any investment, you need to make sure that you do your research, that you devote the proper amount of time to it, and you avoid committing more of your money than you can afford to lose.

If you are just starting out with trading stocks, then you need to make sure that you understand both the potential pitfalls and opportunities. The stock market is in recovery right now, so you need to stay on top of the latest news. When you are opening a brokerage account, the first question that you will be asked is if you want to open a cash account or a margin account. There are very important differences, so let’s break them down.

What Is a Cash Account?

A cash account is the simplest brokerage account option available. Think of a cash account as being similar to your debit card. A reputable cash account will only allow you to spend the money that you already have. If you want to buy stocks using a cash account, then you will need to pay that amount upfront.

Some brokers may allow you to pay with a cheque, but it is more common to add your money straight from your bank account. You can add funds to your cash account ahead of time, and if you agree to terms with your broker, those shares can be lent out as securities or share lending to give you an additional source of income.

What Is a Margin Account?

Margin accounts are a little more complicated. Think of this account as acting more like a credit card. With a margin account, you can borrow on the value of your assets to purchase securities. This is for those who are confident that the value of the assets they are buying will increase drastically, as you will have the opportunity to make much more money back if all goes according to plan.

However, there is also the risk that you could lose more than you invest if things do not go the way that you want them to. You will also have to pay interest on the amount that you borrowed, and your broker may sell securities without informing you if you don’t have enough to pay back what you owe.

Which Is Better for Me?

The answer to the question of cash account vs margin account really boils down to: what kind of investor are you? There are major investments being made to strengthen the security exchange right now, but as an investor, you need to go at your own pace. If you are just starting out, then it makes sense to go with the lower risks afforded by the cash account.

A cash account is more simple and safer, and you will have greater control over your investments. A margin account can offer greater rewards but the risks it carries means that it is a better option for a more experienced or expert trader who has the time to keep a careful eye on their investments around the clock.