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Cash Account vs Margin Account: How Each Settles, Borrows and Can Go Wrong

A cash account requires full payment; a margin account lets you borrow against your securities. How each works, the US rules and the risks of borrowing.

By Published 4 min read

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Key takeaways

  • In a cash account you pay in full for every purchase; in a margin account the broker lends you money against your securities.
  • Under Regulation T you may generally borrow up to 50% of the purchase price, after a FINRA minimum deposit of $2,000 or the full price, whichever is less.
  • Margin magnifies both gains and losses, charges interest, and can lose you more than you deposited.
  • If equity falls below the maintenance requirement, at least 25% under FINRA rules and higher at many brokers, the firm can demand cash or sell your holdings without asking.
  • Cash accounts carry their own rules: buying and selling before paying, called free-riding, can lead to a 90-day restriction.

When you open a brokerage account, one of the first choices is the account type: cash or margin. It sounds like an administrative detail. It decides whether you can borrow to invest, how quickly you can reuse money from a sale, and whether a falling market can force the sale of your holdings. The SEC's investor bulletin on margin accounts opens with a warning in capital letters: some account applications make margin the default, so confirm you are opening the type you want.

The two account types

Cash account Margin account
Paying for purchases In full Partly with a loan from the broker
Borrowing Not allowed Allowed, against your securities as collateral
Interest None on purchases Charged on the amount borrowed
Worst case Lose what you invested Lose more than you invested
Forced sales No margin calls The broker can sell holdings to cover a shortfall
Short selling Not available Done in a margin account

Investor.gov defines a cash account as one in which the investor must pay the full amount for securities purchased, and a margin account as one in which the broker-dealer lends the investor cash, using the account as collateral. Brokers may allow you to have both. The SEC bulletin adds that brokerage firms generally require a margin account to trade options.

How margin works, in numbers

The SEC bulletin's example shows the appeal and the danger together.

You buy a stock at $50.

  • It rises to $75. Paid in full, you gain $25 on $50: a 50% return. Bought with $25 of your own money and $25 borrowed, the same $25 gain is 100% of your money, before interest.
  • It falls to $15. Paid in full, you lose 70%. On margin, you lose all of your $25 and still owe the broker $10 plus interest: more than 100% of what you put in.

Borrowing magnifies the result in both directions, and the interest is a cost even when the trade works. The SEC bulletin notes that margin interest directly reduces your return and raises the amount the investment must earn to break even, and that rates vary substantially between firms.

The US rules

The SEC bulletin summarises the key requirements, and brokers can set stricter "house" rules on top:

  1. Minimum margin (FINRA). Before trading on margin you must deposit $2,000 or 100% of the purchase price, whichever is less. Some firms require more.
  2. Initial margin (Regulation T). You may borrow up to 50% of the purchase price of margin securities. FINRA's margin regulation page confirms that, under the Federal Reserve Board's Regulation T, brokers can lend up to 50% for new purchases.
  3. Maintenance requirement (FINRA). After buying, the equity in your account, the value of the securities minus what you owe, must stay at or above at least 25% of their market value. Many firms require more, typically 30 to 40% according to the SEC.

If equity falls below the maintenance level, you face a margin call, and the broker can sell your securities without asking you first.

Cash accounts have rules too

A cash account cannot lose more than you put in, but it has its own trap: timing. Trades settle one business day after the trade date under the T+1 cycle, and you must pay for a purchase before selling it.

  • Free-riding is buying and then selling a security before paying for it. Investor.gov explains that this is not permitted under Regulation T and may lead the broker to restrict the account for 90 days, during which purchases must be paid in full on the trade date.
  • A good faith violation, FINRA explains, occurs when you buy with proceeds from a sale that has not yet settled and then sell the new purchase before those proceeds settle.

FINRA's 2026 guidance on frequent trading advises anyone trading often in a cash account to watch settled cash closely to avoid these violations.

Margin and frequent trading after June 2026

For years, frequent day traders using margin had to meet the "pattern day trader" rule and its $25,000 minimum. FINRA replaced those requirements with new intraday margin standards that took effect on 4 June 2026, with firms allowed to phase them in until 20 October 2027. FINRA's current guidance describes a $2,000 minimum equity for trading on margin and margin calculations based on positions during the day. The details, and what changed, are in the pattern day trader rule.

Questions to ask before choosing margin

The SEC suggests understanding how a margin account works, how interest affects your return, and asking your broker whether margin is appropriate given your resources, objectives and tolerance for risk. FINRA adds that strategies involving frequent trading on margin generally are not appropriate for investors with limited resources, limited experience or low risk tolerance.

Practising without borrowing lets you see how positions behave first. Learn to Trade Stocks Beginner uses a virtual balance and lessons on managing risk, with no real money or loans involved. It is one of our education apps; the investing basics hub lists the related account guides, including short selling, which requires margin.

Good to know

Frequently asked questions

What is the difference between a cash account and a margin account?
In a cash account you must pay the full amount for anything you buy. In a margin account, the brokerage lends you money to buy securities, using the account as collateral. Margin increases buying power but also exposes you to larger losses, interest charges and forced sales.
How much can you borrow on margin?
Under the Federal Reserve's Regulation T, generally up to 50% of the purchase price of margin securities, after meeting FINRA's minimum deposit of $2,000 or 100% of the purchase price, whichever is less. Brokers may set stricter house requirements.
Can you lose more than you invest in a margin account?
Yes. The SEC's example: buy a $50 stock with $25 of your money and $25 borrowed. If it falls to $15, your $25 is gone and you still owe the broker $10 plus interest, a loss of more than 100% of what you put in.
What is free-riding in a cash account?
Buying a security and selling it before paying for it. Investor.gov explains it is not permitted under Regulation T and may lead your broker to restrict the account for 90 days, during which purchases must be paid in full on the trade date.

Sources

  1. Investor Bulletin: Understanding Margin Accounts (opens in a new tab)Investor.gov, U.S. Securities and Exchange Commission — accessed
  2. Cash Account (glossary) (opens in a new tab)Investor.gov, U.S. Securities and Exchange Commission — accessed
  3. Margin Regulation (opens in a new tab)FINRA — accessed
  4. Frequent Intraday Trading: Understanding the Basics (opens in a new tab)FINRA — accessed
  5. Key Points About Regulation SHO (opens in a new tab)U.S. Securities and Exchange Commission — accessed

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