Should I Open a Cash Trading Account or a Margin Account?

Trading online using the free VPS by Exness is the top solution for the most successful outcomes of the trading sessions. Let’s briefly cast a glance at the main types of trading accounts. We will also compare cash and margin accounts for your convenience to let you understand the key differences.

The Main Types of Trading Accounts

Trading accounts, and account types, can vary wildly from broker to broker. Whether it's cash or margin accounts, accounts for retail or professional traders, the best choice is not always obvious. Here we explore all account options, including some broker-specific “VIP” or “Gold” accounts, and explain your options.

Cash Account

Cash brokerage accounts get their name from the fact that all transactions in the brokerage account must be made with the funds that are available at the time of the transaction. If you decide to buy a stock, you must pay for the stock in time for the trade to settle.

Many brokers go a step further and require you to have the money in your account when you execute your trade. If you don't have enough cash in your account, you won't be allowed to buy the shares in the first place.

The same problem arises when you sell stocks. In a cash account, you are not permitted to withdraw cash proceeds from a stock sale until the trade is settled. You also only have a limited ability to use the proceeds from the sale to buy new shares, as regulators scrutinize cash accounts to ensure customers aren't looking to circumvent any more strict rules that apply to them.

One of the advantages that many investors see in cash accounts is that brokers are not permitted to take the stocks they hold on behalf of their clients in cash accounts for use in their securities lending practices for short selling. Securities lending is an important source of income for brokers, but it carries the risk that the parties to whom they lend stock may not be able to repay the loan.

Margin Account

If you open a margin trading account, the broker will give you a line of credit (leverage). This can help increase potential gains, but it also means traders run the risk of incurring losses that could be unaffordable.

These types of accounts are generally more strictly regulated, with most brokers requiring a minimum investment before any margin trading. It is also possible that a margin call will be made by the broker and a higher deposit will be requested to cover potential losses.

Comparing Cash and Margin Accounts

Simply put, the main difference between a cash account and a margin account is the leverage that most brokers offer clients who want to borrow money in order to invest. To take advantage of this borrowing opportunity, you must have a margin account.

Another difference is that a margin account based on contracts for difference (CFDs) offers the option of short selling to bet on a stock's falling price.

The margin account also offers access to a wider range of products. (currencies, stocks, indices, ETFs, commodities, bonds.)

This simple definition makes it seem pretty easy to decide what type of account you want. In practice, however, there are other things you should consider. Even if you don't intend to invest using leverage, there are situations where having a margin account can make things much easier.

When it comes to margin accounts, rather than buying an investment with cash alone, leveraged investment financing allows you to borrow funds against the value of your current investments in order to buy more shares and possibly even more shares. outperform, provided market conditions are favorable. Although you must repay the amount borrowed, plus interest, you keep any investment income generated by the loan in the account.

Suppose you borrow to invest in stocks or mutual funds that may pay dividends or interest. The interest you pay on the loan can be deducted from earned income, reducing borrowing costs. For example, if you have a tax rate of 40% and you borrow money at a rate of 7%, your after-tax cost of borrowing will be only 4.2% (or 7% x [1 - 0.40]).

Investing with borrowed funds can amplify returns – but remember it can also amplify losses, as shown in the table below.

Risks Associated with Both Cash and Margin Accounts

Whenever you're dealing with the margin, there's the possibility of things going wrong. The problem is not inherent in the structure of the margin account itself, but rather in how you use your margin.

In the broadest possible terms, the main risk of using margin is that if the value of your position drops, you could end up with such large losses that your broker would be forced to liquidate your positions. (Margin Call or Stop Out). Margin agreements always give the broker the ability, in defined situations, to take steps to protect the account against losses greater than the assets in the account can cover.

Savvy investors therefore have two choices. You can stick to a cash account and never be tempted to have margin available. This is the easiest decision for those who never want to worry about margin.

However, the best option for most investors is to get a margin account and never abuse leverage. Margin accounts give you more flexibility in certain situations, the key is to control the amount of leverage you use. As long as you're not putting your entire account at risk, margin can be a valuable tool.

Opening a brokerage account is scary for newbie investors, and understanding the difference between cash and margin accounts is one of the hardest parts of the process. By recognizing the risks, you can choose the account that suits your needs.

Conclusion

A brokerage account provides access to the best stocks in the stock markets, but compared to opening a bank account, the process of opening a brokerage account can seem daunting, especially for those just starting out and difficult to invest.

---

#FeaturedPost #FeatureByExness