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 Type | Net account value | Day Trade | Margin trade | Short selling |
---|---|---|---|---|
Cash account | Unlimited | N/A | No | No |
Margin account | $0-2000 | 3 day trades in 5 business days | No | No |
Margin account | $2,000-25,000 | 3 day trades in 5 business days | Day trade: up to 4 times Overnight:up to 2 times | Yes |
Margin account | ≥$25,000 | unlimited | Yes |
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:
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.