In brief
A cash account requires purchases to be paid in full under the account and settlement rules. A margin account can let the customer borrow from the brokerage against eligible securities. Margin can increase buying power, but it also adds interest, collateral requirements, forced-sale risk, and the possibility of losing more than the cash initially deposited.
For a long-term investor who does not need leverage, a cash account is the simpler default. A margin account should not be enabled merely for interface convenience or faster-looking buying power.
Core differences
| Feature | Cash account | Margin account |
|---|---|---|
| Borrow to buy securities | No | Potentially, subject to eligibility and limits |
| Interest on debit balance | Not applicable | Yes, at the firm’s current margin rate |
| Margin call / forced sale | No margin call | Firm can demand equity or liquidate positions |
| Loss beyond deposited cash | Generally limited by fully paid purchases, absent other obligations | Possible when leveraged positions move sharply or gaps occur |
| Settlement rules | Must make full payment by settlement | Margin may cover eligible transactions, but rules and interest apply |
Margin changes the return equation
If an investor contributes $10,000 and borrows another $10,000, a 20% decline in the $20,000 position removes $4,000 before interest. That is a 40% decline relative to the investor’s original $10,000 equity. This simplified example omits maintenance requirements, taxes, fees, and price gaps.
Leverage amplifies gains and losses while interest continuously raises the hurdle rate. A security does not need to fall to zero for the investor’s equity to be severely impaired.
The broker controls important parts of the process
FINRA and the SEC warn that firms can impose “house” maintenance requirements above regulatory minimums and can change them. A broker may sell securities without contacting the customer first and may choose which positions to liquidate. Depositing more cash after a call is not always sufficient if prices continue moving.
Read the margin agreement rather than assuming the app will provide time to react.
Cash accounts still have rules
“Cash account” does not mean the account can hold only cash. It can hold stocks, bonds, mutual funds, ETFs, and other supported investments. But purchases must be paid for, and trading before payment or settlement can create good-faith, freeriding, or other restrictions under the firm’s and Regulation T rules.
Securities lending and account permissions
Margin agreements can permit a firm to use eligible securities under stated conditions. Fully paid securities-lending programs are separate agreements and can also change voting, tax, or counterparty considerations. Review these settings independently; declining leverage does not automatically answer every lending question.
Bottom line
A cash account limits purchases to available funds, while a margin account adds borrowing power and the possibility of interest, margin calls, and forced liquidation. Margin can expand flexibility, but it can also turn an investment loss into a financing problem; use it only after understanding the agreement and the broker’s house rules.