This is not investment advice. The information provided is for educational and informational purposes only and does not constitute a recommendation to buy or sell any financial product.
Every brokerage account is either a cash account or a margin account. The choice affects how you can trade, how much you can trade, and how much risk you take on.
Cash vs margin at a glance
| Feature | Cash Account | Margin Account |
|---|---|---|
| How it works | Trade with settled cash only | Borrow from broker to trade |
| Minimum balance | $0 | $2,000 (FINRA rule) |
| PDT rule applies | No (unlimited day trades) | Yes (3 per 5 days under $25K) |
| Settlement wait | T+1 (must wait for funds) | Instant (no settlement wait) |
| Short selling | Not allowed | Allowed |
| Options Level 1-2 | Yes | Required for Level 3-4 |
| Interest charged | Never | On borrowed amounts |
| Margin calls | Not possible | Can happen |
| Best for | Beginners, long-term investors | Active traders, options sellers |
Cash accounts
In a cash account, you can only trade with money that has already settled. When you sell a stock, the proceeds are available to trade on the next business day (T+1 settlement).
Advantages:
- No margin interest
- No PDT rule — you can day trade as often as you want with settled funds
- No risk of a margin call
- Simpler, safer
Limitations:
- Must wait for settlement between trades (T+1 for stocks, same as options)
- Cannot short sell
- May get less favorable options approval (Level 1-2 only)
A cash account is the best choice for beginners and long-term investors who are not in a hurry.
Margin accounts
A margin account lets you borrow money from your broker to buy more securities than your cash balance allows. The borrowed amount accrues interest at the broker's margin rate.
Advantages:
- No settlement wait — instant access to funds after a sale
- Can trade with more buying power than your cash balance
- Can short sell
- Qualifies for higher options approval levels (3-4)
- Access to portfolio margin for risk-based requirements
Risks:
- Margin interest. Borrowing costs money. At 10% annual interest, a $10,000 margin balance costs $1,000 per year.
- Margin calls. If your account equity drops below the maintenance requirement (usually 25%), the broker can sell your securities without notice.
- Pattern Day Trader rule. Accounts under $25,000 are limited to 3 day trades per 5 business days.
The pattern day trader (PDT) rule
FINRA Rule 4210 defines a pattern day trader as someone who executes 4 or more day trades within 5 business days in a margin account. PDTs must maintain at least $25,000 in equity in the margin account.
If you are flagged as a PDT with less than $25,000, your account will be restricted to closing positions only until you meet the minimum.
Cash accounts are NOT subject to the PDT rule. However, you must wait for settlement between trades, which limits your day trading frequency.
Which should you choose?
| If you... | Choose a... |
|---|---|
| Are a beginner | Cash account |
| Invest long-term (buy and hold) | Cash account |
| Day trade with under $25K | Cash account |
| Day trade with over $25K | Margin account |
| Trade options (Level 3-4) | Margin account |
| Want to short sell | Margin account |
| Want instant settlement | Margin account |
| Want to borrow to invest | Margin account |
Common questions
Can I have both a cash and margin account? Yes, at separate brokers or as separate accounts at the same broker.
Can I switch from cash to margin? Yes. Most brokers let you upgrade a cash account to margin by applying and meeting the $2,000 minimum.
Do I pay margin interest if I do not borrow? No. You only pay interest on the amount you actually borrow. Having a margin account does not cost anything unless you use margin.
Where to start
Beginners should open a cash account and only upgrade to margin after understanding the risks. Read the margin trading guide and the margin rates comparison before making the switch.