Your account type determines whether you can borrow money to trade. This article explains how a margin account and a cash account differ in borrowing, buying power, settlement, and risk, so you can tell which rules apply to your own trades.
A margin account lets you borrow money from your broker to buy securities, using your existing cash and investments as collateral. Borrowing increases your buying power, but it also magnifies both your gains and your losses. Regulators and brokers set minimum equity requirements (for example, 50% initial margin and 25% maintenance margin). If your equity falls below these levels, you receive a margin call and must either add funds or have positions liquidated.
In a cash account, you must pay for every purchase in full with your own funds, and borrowing isn’t allowed. Cash-account trades are subject to settlement requirements. Freeriding can occur when securities are purchased and sold before sufficient funds are available to pay for the purchase.
Key Differences
Feature | Margin Account | Cash Account |
|---|---|---|
Borrowing | Allowed, with collateral | Not allowed |
Buying power | Cash and borrowed funds | Limited to available cash |
Short selling | Currently not available at LB | Not permitted |
Interest charges | Charged on borrowed funds | None |
Margin requirements | Initial and maintenance margins apply | None |
Risk level | Higher, as losses can exceed deposit | Lower |
Settlement rules | Can reinvest immediately with margin buying power | Must wait for trades to settle |
Key Takeaways
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A margin account lets you borrow from your broker, which increases both your buying power and your risk.
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A cash account limits you to your own settled funds and doesn’t allow borrowing.
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A margin account requires you to meet both initial and maintenance margin requirements. If your equity falls below these levels, you receive a margin call.
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In a cash account, you must wait for settlement before you reinvest. Reinvesting early can lead to a freeriding violation.
Disclosures
This article is for informational purposes only and does not constitute financial advice.