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Understanding investing terms is essential when using brokers like Passfolio to invest. Before signing up for a brokerage account, you need to consider your investment goals and how you intend to reach them. You need to ask yourself questions such as – Is a margin account helpful in reaching your investment goals or will it increase risk too much? Hence, it is important to know the difference between operating a margin account and a cash account. It is also important that you fully understand the risks, rules, and requirements involved in trading securities on margin.

A cash account is a type of brokerage account that requires you to buy securities using cash funds in the account at the time of the settlement. A margin account lets you borrow money from your broker to purchase securities. When you buy securities on margin, you are borrowing money from your broker for part of your transactions. Interest accrues daily and your rate depends on your loan balance and your broker’s base rate. Securities and other assets in your account are pledged as collateral to secure this loan.

Here are some of the differences between a cash account and a margin account:

Requirements
There are regulatory rules that investors must comply with before activating a margin account with a brokerage. It is often referred to as an initial margin requirement. Most brokers require you to keep a minimum of $2000 in your brokerage. After buying securities on margin, you need to keep a certain amount of equity in your account. Your broker may increase its maintenance margin requirements at any time and is not required to provide you with an advance written notice. All you need to do is abide by the stock regulations before buying a stock in a cash account.

Leverage
Having a margin account gives you leverage. As an investor, you can get access to cash by borrowing against securities in your account, up to 50% of what you have. This allows you to take up more securities with extra help from your broker. A margin account can help amplify your profits and losses since you have the ability to increase your borrowing power to purchase more securities. With a cash account, you operate your investments according to available funds.

Risk
With a margin account, your losses and profits are amplified. So, if you had $2,000 to invest and you borrowed another $2,000 to buy $4,000 in stock, and the stock price falls 20%, its value will decrease by $800. Your exposure to market volatility increases—a declining market could result in even greater losses. A decline in the value of the securities that you purchase on margin can require you to provide additional funds to your broker in order to avoid the forced sale of those securities or other securities in your account. If a sale does not cover the deficiency, you will be responsible for any shortfall. Therefore, your downside is not limited to the collateral value in your margin account.
With a cash brokerage account, on a $2,000 stock investment, if the stock price falls 20%, your investment will have lost $400 in value.

Whether you decide to operate a cash or margin account, knowing your risk tolerance level is essential. Passfolio Securities offers you thousands of stocks, ETFs, and REITs. As a PRO user*, you can access margin trading and many more.

*Other charges and fees may apply, such as margin interest. See our fee schedule here.

When considering a margin loan, you should determine how the use of margin fits your own investment philosophy. Because of the risks involved, it is important that you fully understand the rules and requirements involved in trading securities on margin. Margin trading increases your level of market risk. Your downside is not limited to the collateral value in your margin account. Passfolio may initiate the sale of any securities in your account, without contacting you, to meet a margin call. Passfolio may increase its “house” maintenance margin requirements at any time and is not required to provide you with the advance written notice. You are not entitled to an extension of time on a margin call.