Traders frequently face complex decisions, such as choosing the right investment asset, the right time to enter/exit the market and the trading strategy.
These decisions in split-seconds are what make traders richer than others. One of the fundamental decisions traders have to make before even entering the market is choosing between margin and cash account.
The choice between these two types of accounts relies on analytical skills and one’s capital and style. Let’s explain the difference between them.
Trading with a cash account means placing a market order using the cash money you have in your account or the available balance. This is an easier way to trade and execute different orders because you only need to ensure you have the right amount or more in equity.
How To Trade With Cash Account?
To start with a cash account, you must set up a trading account at a broker of your choice and deposit money in your account according to the minimum deposit requirement.
Once the money shows up in your balance, you can enter trading positions by choosing the asset class and quantity. Buying and selling in the market is only done if you have the product(s) in question, including shorting stocks.
Margin accounts allow you to trade with the money you have in your balance besides placing orders that are worth more than what you can afford in your balance. This is done through borrowing money from the broker.
Margin trading uses leverage, where the broker multiples your equity according to the market order you want to execute.
How To Trade With Margin Accounts?
Brokers offer leverage at different ratios between different securities. For example, a broker may offer stock trading at a 1:10 leverage ratio. If you have $1,000 in your balance, you can explore market orders worth $10,000 (1,000 * 100).
Once you close the position, you pay back the broker’s money. However, this is risky because if the market goes sideways and you lose the leveraged position, the broker may liquidate your account to compensate for the losses.
Your ability to trade with margin and cash accounts is proportional to your degree of market expertise and the sum of money you are willing to lose in the market. Cash accounts are straightforward and are a good starting point for rookies. However, risk-takers trade with margin to explore trade positions with higher returns.