Before opening a brokerage account, an investor may ask a broker to differentiate between margin Vs cash account and tell the difference.
If the broker has told the investor the need to open an investment account then this question may arise.
Understanding the dissimilarity between the two accounts could help the investor to choose wisely. As a stockbroker or an investment advisor, you should be ready to answer questions surrounding both account.
In our previous article, “2 types of brokerage account best for investors,” we emphasize on margin accounts and cash accounts.
In this article, we shall highlight more on both accounts and then go ahead to tell the difference.
An investor who wants to trade in securities would likely have to open either of these investment accounts, a margin or cash account.
With either of these accounts, it will be easier to purchase and sell assets. Margin Vs. cash account, comparing the two accounts and considering which one to choose.
Margin Vs Cash account
In the world of investment, margins vs. cash account is like comparing savings vs. current account.
The investor should be able to differentiate between the two accounts. Understanding how they work, and the risks associated with each before choosing the right investment type could help to minimize regrets
Cash account
The process of opening an investment account is easy. An investor who prefers to open a cash account can approach an online broker through the broker’s website. Then in a matter of minutes, the account is established.
The investor goes ahead and deposits some funds, any amount so deposited is the amount to use in funding the investment.
The broker may decide to keep the money in a money market fund but this does not mean the investor will not access it. The investor can have access to it when needed at any time.
Interestingly, money kept in a money market fund can give a reward of returns. Therefore, the investor benefits from this and can purchase the securities as desired.
Margin account
The margin account is the opposite of the cash account. This account allows the investor to borrow from the broker or brokerage firm. While the investor pays the loan at a future time and the interest that accrues from it.
However, there is a margin rule to observe that a certain amount lesser than the purchase price is deposited before the loan is granted. Again, the investor will only borrow 50% of the investment price.
New investors are advised to ignore this type of account at the initial stage until they become experts in the field.
It may seem to be an advanced method with some negative impacts surrounding it. There is also the maintenance margin where the investors retain 25% of the market value.
What is the differences between Margin account and cash account
1. Opportunity to excel
With a margin account, there is an opportunity to increase revenue although this can be possible with an expert investor. When the investor understands the risk and how to handle situations that involve larger responsibilities.
It is just a matter of applying “common literacy”, the investor might not be able to handle varieties of assets while trying to build an investment portfolio.
The best is to employ an investment adviser who would help him to achieve this goal.
2. With a cash account, you cannot purchase all the securities, as you are limited to the amount you deposited.
While with a margin account, you can buy as much as you want hence the opportunity to borrow is available.
3. The cash account is more advantageous for beginner investors because it will help them achieve investment goals. Then on becoming an expert investor, they can opt for a margin account.
4. With cash accounts new investors could learn how to manage risk especially when they start with little funds.
5. Margin account allows the investor to borrow a loan, which is subject to paying interest.
6. With a margin account, an investor needs to adhere to maintenance margin rules. This demands a level up in equity. Otherwise, the broker may have to act without notice and sell the investor’s assets to maintain the margin.
The bottom line
The main difference between margins vs. cash accounts is that in cash accounts there is no loan, interest to pay, or rules to observe. While all these are available in a margin account.
Great article.
Thanks