The choice between a cash account and a margin account is one of the more consequential decisions in the brokerage evaluation process, since it directly affects how much risk you are taking on.
How a Cash Account Works
In a cash account, you can only purchase securities using funds you have actually deposited. If you want to buy $2,000 worth of a security, you need $2,000 in settled cash in the account. Your maximum possible loss on any position is generally limited to the amount you invested.
How a Margin Account Works
A margin account allows you to borrow a portion of a purchase price from the brokerage, using your existing account holdings as collateral. This means you can control a larger position than your cash alone would support. The tradeoff is that margin magnifies both gains and losses relative to your actual invested capital — a decline that would be manageable in a cash account can result in a larger proportional loss in a margin account.
Understanding Margin Calls
If the value of your margin account falls below a required maintenance level, the brokerage issues a margin call, requiring you to deposit additional cash or securities, often on short notice.
FINRA and stock exchanges set minimum margin requirements, but individual brokerages can — and often do — set stricter requirements, so the specific threshold that triggers a margin call varies by firm.
Comparing the Two
| Factor | Cash Account | Margin Account |
|---|---|---|
| Funding requirement | Full payment required | Can borrow against holdings |
| Maximum loss potential | Generally limited to amount invested | Can exceed amount invested |
| Interest charges | None | Charged on borrowed amount |
| Margin call risk | None | Present if account value falls too low |
| Complexity | Lower | Higher |
Margin Interest Is a Real, Ongoing Cost
Beyond the risk of a margin call, any amount actually borrowed accrues margin interest, which is a direct cost tied to how much you borrow and for how long. This is separate from — and adds to — the ways a brokerage generates revenue more broadly.
You Are Not Required to Use Margin Just Because It Is Available
An important, often overlooked point: having a margin-enabled account does not obligate you to borrow. You can hold a margin account and simply never use the borrowing feature, functioning exactly like a cash account while retaining the option to use margin later if you choose to, with full understanding of the risks.
Who Each Account Type Tends to Suit
- Cash accounts often suit beginner and long-term investors who want to limit risk to the amount they actually invest.
- Margin accounts often suit more experienced investors and traders who understand leverage risk and have a specific strategy requiring it.
Common Mistakes to Avoid
- Opening a margin account without understanding what triggers a margin call.
- Assuming margin trading only affects potential gains, not potential losses.
- Not checking a specific brokerage's maintenance margin requirements, which can be stricter than regulatory minimums.
- Using margin without a plan for how you would respond to a margin call.
Conclusion
A cash account limits your risk to what you actually invest, while a margin account introduces leverage that can magnify both outcomes and add real costs through margin interest. Choose based on your experience level and risk tolerance, not simply because margin is available on the account you opened.