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What's the difference between margin and cash account?
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What's the difference between margin and cash account?

A cash account is a type of brokerage account in which the investor must pay the full amount for securities purchased.

A margin account is a brokerage account which allows investors to leverage the funds and securities they already own to purchase additional securities. It provides a great opportunity to leverage your investment to help increase your return. At the same time, it has the risks of magnifying your losses.

Account TypeNet account valueDay TradeMargin tradeShort selling
Cash accountUnlimitedN/ANoNo
Margin account$0-20003 day trades in 5 business daysNoNo
Margin account$2,000-25,0003 day trades in 5 business daysDay trade: up to 4 times
Overnight:up to 2 times
Yes
Margin account≥$25,000unlimitedYes

1. Buying Power

The buying power in a cash account is the maximum dollar amount that is available for placing trades.

Cash Account

Simply put, in a cash account, your money is your buying power. You cannot borrow funds to place trades.

Margin Account

A Margin account allows you to leverage the funds and Securities you already own to purchase additional securities. There are two kinds of buying power: Day-Trade Buying Power (DTBP) and Overnight Buying Power (ONBP)

Day Trade Buying Power refers to the amount available to day trade for the day. Day-trade buying power is equal to the equity in your account at the close of business on the previous day, less the Self-Regulatory Organization(SRO) requirements, multiplied by up to four. Each security will have an SRO requirement, which is based on the exchange minimums allowed.

Overnight buying power refers to the money available to buy securities and hold the position overnight. In the majority of cases, this amount is simply double the cash on hand.

Margin trading is only available for margin accounts with no less than $2,000 net account value.

2. Settlement Rules (Funds Settled)

Stock trades settle 2 business days following the trade date (T+2) and option trades settle 1 business day following the trade date (T+1).

Cash Account

For a cash account, you must pay attention to your settled funds and unsettled funds. Settled funds. Unsettled funds mostly includes cash received from liquidating positions in the last two days. After it is settled, it becomes settled funds.

Settled Funds:

a) Immediately available as buying power

b) Immediately available to withdraw

Unsettled Funds:

a) Immediately available for use to place trades, but closing the position before the funds generated from the closing sale have settled can result in a good-faith violation (GFV)

b) If you have 2 or more GFVs, unsettled funds will be not available for trading until the closing trade has settled

Example:

  • Alice purchased 100 shares of XYZ stock on Tuesday. The total cost of the purchase was $1,000.
  • The same 100 XYZ shares were later sold on Tuesday. The sale generated proceeds of $2,000.
  • These proceeds were immediately made available as buying power even though they are not settled (if Alice’s account has no GFV).
  • Alice then purchases 100 shares of ABC on Wednesday. These shares must be held until Thursday, when the sale of XYZ settles. Selling before this day would result in a good-faith violation.

Margin Account

Trading in a margin account would allow you to use unsettled funds to place trades. It will avoid all the settlement date related violations that could happen in a cash account. Proceeds from the sale of positions will immediately be available as buying power.

3. Day Trades

A day trade is the purchase and sale of the same stock on the same day.

Cash Account

For a cash account, it is not applicable to count the day trades. You have no limit to make day trades with your settled funds. However, please keep in mind, trades placed in a cash account require 2 business days for the funds to fully settle before they can be used to buy and sell again. (Trade date plus two business days.) Good-faith violations occur when the purchase of a security uses funds that have yet to settle in the account. So, if you make day trades with cash account while you do not have enough settled funds, it is very easy to receive good-faith violations (GFVs).

Margin Account

According to regulatory rules, ordinary investors can make at most 3 day trades within 5 business days. If you make more than 3 day trades within 5 business days, you will be marked as a Pattern Day Trader (PDT).

As a PDT, you must maintain a minimum equity of $25,000 to be eligible for unlimited day trades.

4. Withdrawal

Cash Account

For a cash account, you can withdraw up to the settled cash you have in your account. Funds are not available to withdraw before fully settled.

Margin Account

For a margin account, the total amount available to withdraw includes both your cash balance as well as the amount available to borrow generated from securities held in margin.


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