Trading financial assets include a wide range of options and strategies that investors can take to achieve financial profits. Among these popular strategies are margin trading and cash trading. Margin and cash accounts are staples of stock trading and financial markets, as they give investors access to greater capital and potentially greater profits. In this article, we will review the concepts of margin account and cash account, compare them, and understand how to use each effectively in the money market.
Margin Account: Used in forex trading for leverage. It allows traders to open larger positions than their balance. Brokers provide a loan for larger trades. For instance, with 1:100 leverage, a trader can open a $100 position with just $1. But, using margin increases risk, as losses can exceed the account balance. Traders should understand margin use and manage risks carefully.
Cash Account: On the other hand, the Cash Account is based on using only own funds in trading. This means that investors buy and sell assets using the money they already have without resorting to borrowing. A cash account is less risky in terms of loss of capital, but reduces the investor’s ability to exploit greater trading opportunities.
Comparison between margin account and cash account:
- Leverage: A margin account provides the opportunity to use higher leverage than a cash account, which increases the possibility of achieving significant profits.
- Risk: A margin account involves greater risks due to borrowing, while a cash account reduces the risks associated with debt and interest on margin.
Margin account versus cash account and securities in your account
In the cash account, the trader can buy securities, which are exclusively at the trader’s disposal, as no one else has the right to do anything with them. In a margin account, the broker can loan the shares you purchased to another trader who opens a sell deal. All this is specified in the contract and is implemented through so-called REPOs, which are short-term agreements that allow the seller to sell securities to the buyer with the obligation to buy back those securities at a specific date at a pre-agreed price. Buybacks are mainly used for short-term borrowing and investing) as the trader receives a commission as the owner of the shares. These moments carry certain risks, but each can be managed.
Advantages of trading CFDs:
- Lack of strict requirements for minimum initial investment; The minimum deposit ranges from 50 to 100 dollars.
- Leverage is provided regardless of the trader’s qualifications.
- There is negative balance protection. CFD trading accounts combine the benefits of margin and cash accounts.
- Immediate execution of trades. Any asset can be bought or sold within milliseconds. There is no settlement period according to the T + 2 system unless the financial market conditions stipulate otherwise.
- More than 200 assets available for trading, including cryptocurrencies.
However, CFD trading carries the same risks as margin trading. These risks must be taken into account when establishing a risk management system.
Trading strategies for cash investment account:
- Position trading (or long-term trading) involves making money from long-term uptrends. This strategy is suitable for trading stock indices and buying shares of companies from the retail sector with a constant demand for products. It is possible to form an investment portfolio and achieve an annual relative return and distributed profits.
- Trading based on fundamental analysis.
Margin account versus cash account and the advantages and disadvantages of the latter
What are the advantages of cash accounts? We will review below the advantages of cash accounts:
- You cannot lose more money than you have. You could lose your entire deposit if the value of the asset deteriorates completely. In this case, you will not reach a negative balance.
- You will not receive margin requests and will not be subject to forced stoppage of trades. You can wait until the decline ends. You can also buy assets without the risk of your position being stopped.
- Flexibility. A trader in a cash account can buy and sell securities for any amount he can afford in cash. As for a margin account, the broker can request a minimum trade size.
- Low commissions. Cash accounts may have lower commissions than margin accounts because the trader does not use borrowed funds and does not pay interest on them.
The advantages also include the absence of legal restrictions. For example, in the US, regulators set minimum margin requirements for margin accounts and link the number of transactions to the minimum cash deposit amount (PDT rule). While there are no such restrictions on cash accounts.
What are the disadvantages of cash accounts? Cash accounts also have a number of disadvantages:
- Limited opportunities. Traders can only trade with their own money. Short selling is excluded, as the investor can only sell available assets.
- There is a settlement period. Funds will be credited to the account two to three business days after the asset is sold.
• There is no financial leverage. The trader misses the opportunity to make money from the temporary decline in the value of the asset in the market