With a brokerage account, investors can deposit money with a licensed brokerage firm that conducts trades on their behalf. The broker handles the investor’s finance on their behalf. There are various types of brokerage accounts that investors can avail. Among those, there are also margin and cash accounts. There are some differences between both of these.
What is a Margin Account?
A margin account is a type of brokerage account that enables investors to borrow against the assets’ value in the account. It allows investors to use this amount to purchase new positions and sell short. Investors can use margin to leverage their position and benefit from market fluctuations. They can also use it to make cash withdrawals against the account value.
In essence, a margin account allows investors to borrow from the broker. With a margin account, investors can make investments on a margin, which represents borrowed money. That means that investors don’t need to pay the full cost of the investment upfront. Instead, the broker covers a part of the investment for them.
However, margin accounts come with some restrictions. For example, these accounts may subject investors to rehypothecation. Similarly, for the borrowed amount, brokers will also charge interest from the investor. These rates differ according to the brokerage firm that investors use and are usually higher than market rates.
Despite the disadvantages, margin accounts come with some flexibility for the investors as well. Usually, these accounts don’t have a set repayment schedule. Therefore, investors can take their time with repaying their loans. Investors can also withdraw and return the amount at any time at their discretion. However, they may be a limit to that.
What is a Cash Account?
A cash account is a type of brokerage account that allows investors to make transactions from only the available cash balance or long positions. Therefore, investors must deposit a payment into their cash account before buying a security. Investors already holding a stock can also sell their existing shares to make the cash available for their transactions.
Cash accounts aren’t as complicated as margin accounts. With cash accounts, investors get much better control of their transactions and holdings. For example, brokers cannot lend it to interested parties without the investor’s approval or rehypothecate it. However, allowing the broker to lend out the account can provide several benefits to the investor.
Cash accounts are, however, less flexible for investors. For example, if investors don’t have cash available in their cash account, they cannot obtain a loan from the broker. Therefore, it may result in missed opportunities. Similarly, investors can’t benefit from some complex investment strategies with cash accounts.
Investors that have cash accounts also aren’t subject to margin calls because of no margins involved. Therefore, investors can avoid the risk of losing their assets due to exposure to those limits. However, these accounts limit investors’ transactions to the amount they have in their accounts only. Cash accounts may not be as prevalent with all brokers and may come with some requirements, such as minimum balance and other conditions.
When it comes to brokerage accounts, investors have various options. Investors can use margin accounts, which allows them to lend an amount from the broker to conduct transactions. However, these may be subject to some conditions from the broker. Cash accounts only limit investors to transactions that they can cover from their existing cash or share balance.