A cash account requires you to pay in full for purchases. A margin account can allow you to borrow from the broker using account assets as collateral. That borrowing increases purchasing power, but it also increases losses and gives the broker important rights over the account.
How a cash account works
You buy securities with available cash and must meet payment and settlement rules. A cash account can hold stocks, bonds, funds, and cash; the name does not mean it can hold only cash. Trading before funds settle can create restrictions, so learn the settlement rules for your market.
How a margin account works
The broker may lend money against eligible securities. You pay interest, and the assets secure the loan. If account equity falls below required levels, the broker can demand more collateral or sell positions. The firm’s own “house” requirements may be stricter than regulatory minimums and can change.
Key differences
| Feature | Cash account | Margin account |
|---|---|---|
| Borrowing | No margin loan | May borrow against assets |
| Loss potential | Generally limited to invested amount, excluding other obligations | Can exceed the cash deposited |
| Interest | No margin interest | Interest accrues on borrowed funds |
| Forced sale | Not caused by a margin deficiency | Broker may liquidate assets |
| Short selling | Generally unavailable | Usually requires margin approval |
A margin-loss example
If you invest $5,000 and borrow another $5,000, you control $10,000 of securities. A 20% market decline reduces the securities to $8,000. After subtracting the $5,000 loan, equity is $3,000 before interest—already a 40% loss on your original cash.
Why a broker can sell without your permission
The margin agreement normally authorizes the firm to protect its loan. If equity is insufficient, it may choose what to sell and may act without waiting for you to deposit cash. A stop order does not eliminate gap risk or guarantee enough proceeds to repay the loan.
Questions before accepting margin
- Is margin optional, or is the account opened as margin by default?
- What interest rate and calculation method apply?
- What are initial and maintenance requirements?
- Can requirements change immediately for volatile assets?
- Can fully paid securities be lent, and can you opt out?
- Which trading and settlement restrictions apply to cash accounts?
Which account is simpler for a beginner?
A cash account is generally easier to understand because it avoids borrowing, margin calls, and interest. It still carries investment risk and requires disciplined settlement. A margin account should not be chosen merely because an app enables it or offers more buying power.
Frequently asked questions
Can you trade stocks in a cash account?
Yes. You can buy and sell eligible securities using settled cash, subject to the broker’s rules.
Can you lose more than you deposit in a margin account?
Yes. Losses, interest, and forced liquidation can leave a remaining debt.
Can a broker change margin requirements?
Yes. Firms can impose stricter house requirements, including during volatile conditions.
Why did the broker open a margin account by default?
Practices differ. Read the application and contact the firm if the account type is unclear.
Read the full cost guide, stop-order risks, and how to compare platforms.
Primary source: FINRA guidance on brokerage accounts.
This article is general education. Account rules differ by country and firm. Margin users should also understand the additional risks of leveraged CFD products.