Cash vs Margin Accounts

Introduction

A brokerage account comes in two main types: cash and margin. They differ in whether you can borrow money to trade. This lesson explains the difference and the risk.

Cash Account

In a cash account, you trade only with money you've deposited. No borrowing.

• Can't spend more than you have
• No leverage
• Simpler and safer
• Best for beginners

Margin Account

In a margin account, the broker lends you money to buy securities, using your investments as collateral. This creates leverage.

• Control larger positions than your cash allows
• Amplifies gains and losses
• You pay interest on the borrowed amount
• Higher risk

The Key Difference

Cash account:  buy $1,000 with your $1,000
Margin account: buy up to $2,000 with $1,000 (plus borrowed $1,000)

How Borrowing Puts You at Risk

With margin you must repay the loan regardless of performance. If your position falls, you can lose more than your original deposit and face a margin call (next lesson).

Practical Advice

• Start with a cash account until you understand the risks
• Only consider margin when you fully understand leverage
• Never use margin with money you can't afford to lose

Real-World Example

Anna opens a cash account and buys $500 of an ETF with her deposited $500. Her friend opens a margin account and uses $500 to control $1,000 of exposure — but if the position falls, the friend faces losses and interest on the borrowed $500.

Summary

• Cash account = trade only with your own deposited money
• Margin account = borrow from the broker with collateral (leverage)
• Margin amplifies both gains and losses and charges interest
• Margin can produce losses beyond your deposit
• Start with a cash account; treat margin as advanced and risky

Next Lesson

How margin and leverage really work.