Trading in financial markets developed over the years, and more brokerage companies began offering various ways to invest and make money.
If you have dealt with a broker before, you would already know the types of trading instruments and accounts a broker would offer you, including investing with the broker’s money using borrowing and leverage.
How does borrowing money from a broker work? And is it better than trading with your own money? We will answer that by explaining margin accounts as the following.
What Are Margin Accounts?
Trading with margin enables you to explore broader gain opportunities by entering market positions that you cannot afford with your money.
Margin accounts are investing accounts where leverage trading is available. Thus, you can place high-value market orders for a chance to get higher returns. This is done through borrowing cash from the broker to pay the money back when you exit the market at a profit.
Assume you want to buy 1 BTC worth $30,000 and have $300 in your account as equity. Using the margin account with leverage of 1:100, the broker will enable you to place a market order at $30,000 after multiplying your money by 100.
What Are Cash Accounts?
This type of account is simple. You trade using your money in your account, and any gains you make are yours without having to pay any money back.
Cash accounts do not incorporate leverage or borrowing, making them easier to deal with and safer without exposure to extra risks. Moreover, you cannot place a sell order if you do not own the product in question, like stocks or commodities.
Which One Is Better?
Choosing the right trading account type between margin and cash depends on your experience, expectations and capital. Margin accounts suit experienced traders with massive funds who can afford to take exaggerated risks and pay back any unpredictable losses to the broker.
On the other hand, cash accounts make it easier for new investors to get involved in financial markets without losing a substantial amount of money and without taking additional risks.
Trading with margin enables traders to explore higher-value market positions and exposure to more gains. However, it comes with additional risks if the market goes sideways.
Therefore, cash accounts are recommended if you do not have sufficient experience or money to lose and gamble in the market. Simply, you trade with what you own in your balance.