Cash Account vs Margin Account: Which Should You Choose?

What Is a Cash Account?

A cash account is exactly what it sounds like: you can only buy securities with cash you've deposited. If you have $5,000, you can buy $5,000 worth of stocks. No borrowing.

The main limitation is settlement time. When you sell stock, the trade takes one business day to settle (T+1). In a cash account, you can't use those proceeds to buy something else until settlement completes.

Example: You sell $1,000 of Apple on Monday morning. You can't use that $1,000 to buy something else until Tuesday (assuming it's a business day).

What Is a Margin Account?

A margin account lets you borrow money from your broker to buy securities. But here's what most people don't realize: you don't have to borrow.

A margin account simply gives you the option to borrow. Many features require margin account status even if you never intend to borrow a cent:

• Instant settlement: Use sale proceeds immediately without waiting for T+1
• Options trading: Most strategies require a margin account
• Short selling: Only available in margin accounts
• Instant deposits: Many brokers give you buying power immediately while ACH clears

The Case for Margin Accounts (Even If You Don't Borrow)

Most brokers default to margin accounts because the benefits are significant even without borrowing:

1. No Good Faith Violations

In a cash account, if you buy stock with unsettled funds and then sell it before those funds settle, you commit a "good faith violation." Three violations in 12 months gets you restricted.

In a margin account, this isn't an issue—your broker extends temporary credit automatically, even if you have the cash.

2. Trade More Freely

Want to sell one stock and immediately buy another? Margin accounts make this seamless. Cash accounts make you wait.

3. Access to Options

Even basic options strategies (covered calls, cash-secured puts) typically require a margin account. You're not borrowing—you're just using the account type that allows these trades.

When You'd Actually Use Margin (Borrowing)

Margin borrowing makes sense in limited situations:

Opportunistic Buying

Market crash, great opportunity, but no cash available? You could use margin temporarily, then pay it off when you deposit more funds or sell other positions.

Securities-Based Lending

Some investors use margin loans instead of traditional loans. At 4.9% (Public) or 5.75% (Robinhood Gold), margin can be cheaper than a personal loan or HELOC.

Leveraged Trading (Advanced)

Active traders sometimes use margin to amplify returns. A 50% margin position doubles your exposure—and your potential losses. This is risky and not for beginners.

The Risks of Margin Borrowing

If you actually borrow on margin, understand these risks:

Margin Calls

If your portfolio drops enough, your broker will demand you deposit more money or sell positions to reduce your loan. This often happens at the worst time—when markets are crashing.

Example: You have $50,000 invested and borrow $25,000 on margin (total $75,000 position). If the market drops 40%, your position is worth $45,000 but you still owe $25,000. Your equity is only $20,000—and your broker may force you to sell at fire-sale prices.

Interest Costs

Margin interest accrues daily. At 10% annually on a $25,000 balance, that's $2,500/year—eating into any gains.

Amplified Losses

Leverage cuts both ways. A 2x leveraged position loses 20% when the market loses 10%. Many investors have been wiped out by leveraged positions during crashes.

Share Lending: A Hidden Consideration

In a margin account, your broker may lend your shares to short sellers. They collect a fee and (usually) keep most of it.

In a cash account, your shares generally can't be lent without explicit consent.

This matters if:

• You hold stocks that are heavily shorted and don't want to enable short selling against your own position
• You want to participate in proxy voting (lent shares lose voting rights)
• You hold dividend stocks and want qualified dividend treatment (payments in lieu of dividends may be taxed differently)

For most investors, this is a minor concern. But if you hold meme stocks or heavily shorted names, consider whether you want your shares potentially being used against you.

Which Should You Choose?

How to Get a Margin Account

Most brokers offer margin accounts by default for taxable accounts. When opening an account, you'll be asked whether you want margin enabled. Say yes unless you have a specific reason not to.

IRAs are always cash accounts—you can't borrow on margin in retirement accounts (with limited exceptions for certain options strategies).

Margin Rates: If You Do Borrow

If you plan to actually borrow on margin, rates vary dramatically:

• Public.com: 4.9% (lowest)
• Robinhood Gold: 5.75%
• Interactive Brokers: 5.83%
• Fidelity: 10.575%
• Schwab: 10.00%

The difference between 4.9% and 10.575% on a $50,000 balance is nearly $3,000/year. If you plan to use margin, choose your broker accordingly.

The Bottom Line

For most investors, a margin account makes sense even if you never borrow. The flexibility benefits (instant settlement, options access, no good faith violations) are valuable, and you're not obligated to use margin.

The key is discipline: having a margin account with borrowing available doesn't mean you should use it. Treat margin borrowing as an emergency tool, not a regular strategy.

If you're worried about temptation or don't trust yourself with leverage, choose a cash account. The slight inconvenience of T+1 settlement is worth the peace of mind.