If you’re looking to open a brokerage account and start trading financial securities, you’ll have your choice of several types of brokerage accounts.
Setting aside specialized retirement accounts, the two main types of taxable brokerage accounts are a standard account (sometimes called a cash account) and a margin account.
Standard accounts are more straightforward and better suited for investors who aren’t looking to dive into a ton of complexity. Margin accounts let you borrow money from your broker, expanding your purchasing power and offering additional investment opportunities—but the bigger potential rewards come with bigger risks.
What is a brokerage standard account?
A standard brokerage account is also called a cash account, and that’s because you can trade only with the cash that you’ve deposited into your account.
This is a marked difference from other types of brokerage accounts that let you trade on margin—meaning you borrow money from your broker to buy securities and use those same securities as collateral for the loan.
We’ll get into that more in a minute, but the point is that a standard account doesn’t let you increase your purchasing power beyond the cash you’ve got on hand in your account.
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What can I trade with a standard account with a brokerage?
Cash brokerage accounts can hold and trade a wide variety of investments, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs), as well as options and certain other types of more complex instruments called derivatives. You can also, of course, choose to keep some of your funds in cash.
If you want to buy, say, $5,000 worth of stock, you’ll have to have that $5,000 in cash in your account before your buy order settles—usually two days after you make the order.
Because standard accounts aren’t retirement accounts, there’s no limit on how much money you can deposit into them and no restrictions on when you can withdraw. Note, however, that these non-retirement accounts are taxable ones: If you earn interest or dividends on your investments, or if the investments you sell to cash out have increased in value since you purchased them, you’ll be subject to taxes on these gains in the tax year that you receive the money.
Potential advantages of a standard account
Straightforward
The cash nature of a standard brokerage account makes it relatively simple: You deposit cash, and you can trade only what you have on hand. You don’t need to worry about the complexity of borrowing money from your broker or delving into the more complicated trades available to margin accounts.
No interest charges
Because you’re trading only with your own cash, you won’t owe the interest that comes with a broker loaning you money through a margin account.
Often no minimum balance requirements
An increasing number of firms don’t require a certain minimum balance to open a standard account, though you may be limited on certain trades if your balance gets too low.
Potential drawbacks of a standard account
Limited buying power
The flip side of cash accounts’ simplicity is that your buying power is limited to your account funds. If a certain opportunity comes up that requires a bigger investment, you might not be able to take advantage of it.
Need to wait for trade settlement
Once a trade is executed, it typically takes about two days for it to “settle”—meaning to be fully completed. If you want to make more trades but your cash is still tied up in trades that are still processing, you’ll have to wait for them to settle.
What is a brokerage margin account?
A margin account lets you borrow money from your broker and also gives you the option to engage in more complicated trades than a cash account.
When you open a margin account, you’ll typically have to deposit a certain amount of cash or investments as the initial requirement for collateral. Then you can borrow money from your broker—up to a certain amount that’s usually a percentage of the value in your account—to buy more securities without fully paying for it yet. The investments you purchase become collateral for the loan.
What can I trade with a margin account with a brokerage?
Margin accounts have access to additional, more complex investments beyond what’s available to standard account holders, like short-selling a stock. They can also trade beyond the cash available in their account by borrowing from their broker on margin.
Here’s how it works: Say you buy a share of a company for $100, and after that the price increases to $150. With a cash account you’ll have paid for it in full, meaning you’ve earned a 50% return. But if you bought it on margin, paying $50 yourself and $50 lent from your broker, you’ll have earned a 100% return on your personal cash.
That said, you’ll have to pay back the $50 loan plus interest to your broker—and that holds true even if the trade didn’t go your way.
Say that stock you bought for $100, half your cash and half margin, falls to $50. You’ll have lost 100% of your personal investment, and you still have to pay back the $50 plus interest.
Potential advantages of a margin account
Increased purchasing power
Because you can borrow from your broker, you’re not limited to trading only with the cash you have in your account.
Ability to short sell
Margin accounts let you not only borrow money, but also borrow stock in a way. In a short sale, you borrow stock from a firm, betting that the price will decline. If it does, you buy the stock at the lower price and give the stock back to the firm at the higher price at which you lent it, pocketing the differential as profit. This is risky, though, because if the price goes up you’ll have to cover the difference.
Potential drawbacks of a margin account
Higher risk
Margin accounts can be very risky and typically aren’t for the newbie investor. If the security you bought on margin declines in value, you could lose some or all of your own personal investment—and you still have to pay back the loan to your broker.
Interest fees
Margin is your broker giving you a loan, and like a bank loan, you’ll owe interest for the privilege. And these interest fees can add up quickly.
Minimum balances and margin calls
After you trade on margin, US federal regulations require margin account holders to keep a minimum balance of 25% of the total market value of the securities in your account—and many brokerage firms require even more. If your account falls below that level the firm may make a “margin call” asking you to deposit more cash or investments. Or, if your agreement with them allows, they might simply sell the securities to meet the margin call without consulting you.
Which type of brokerage account is right for me?
If you’re just starting on your investment journey, a standard/cash account is likely right for you—along with those seeking a more conservative or even just a simpler approach. Since you’re trading only with your own money, you avoid the complexity and additional risk involved in trading on margin and delving into short-selling.
If you’re a more experienced investor looking to expand your buying power, a margin account may be better suited for your needs. Margin account holders should understand the risks and the terms of both buying on margin and trading more complicated financial instruments, including the fact that they may end up losing more than the amount of their investment.
Other general considerations when opening a brokerage account include fees and commissions charged for trades, investment options available, whether cash-outs are instant or if you’ll have to wait for your money, and the level of customer service and broker involvement you prefer.