Margin accounts and cash accounts are two types of non-registered investment accounts, each with distinct funding requirements, benefits, and risk profiles. Understanding how they work — and how they differ — can help you decide which account type fits your investing goals. This article covers the basics of each, their pros and cons, key differences, and how to choose between them.
What is a cash account?
A cash account is a type of non-registered brokerage account that lets you buy and sell securities using only the money you deposit. It's one of the most straightforward ways to start investing.
Cash accounts can typically hold stocks, exchange-traded funds, mutual funds, fixed-income products, and more, but many brokerages further limit the types of securities you can hold in cash accounts. For example, while regulatory bodies may allow you to trade mutual funds in a cash account, your brokerage may not. Margin trading, short selling, and trading complex options are not allowed in a cash account.
Pros and cons of a cash account
Cash accounts offer several advantages for investors, particularly those who are newer to the markets or prefer a straightforward approach.
Advantages:
Lower risk: you can only lose the money you invest — there's no risk of owing more than your initial deposit.
Simplicity: cash accounts are straightforward to manage, with no borrowing mechanics or interest charges to track.
No margin calls: since you're not borrowing, you won't face a margin call demanding additional funds during a market downturn.
No interest charges: all returns go directly to you — there are no borrowing costs eating into your gains.
Disadvantages:
Limited buying power: you can only invest the cash you have on hand, which may mean missing opportunities.
No short selling: cash accounts don't allow you to profit from declining stock prices.
Fewer trading strategies: complex options strategies and other advanced techniques aren't available.
What is a margin account?
Margin accounts are investment accounts that let you borrow funds from your brokerage. The brokerage uses the assets in the account as collateral for the loan, and you pay interest on the amount borrowed. The amount borrowed is represented as a negative debit (cash) balance in your account. Margin amplifies your buying power, allowing you to invest more than you could on your own and potentially earn greater returns; however, trading on margin can also amplify your losses, and you can end up losing more than your initial investment.
When you purchase stocks or other investments using margin, you pay a portion of the purchase price and your brokerage lends you the difference. The amount your brokerage can lend you depends on the margin requirement. The Canadian Investment Regulatory Organization (CIRO) sets minimum margin requirements for each security that can be bought on margin. Your brokerage can set different margin requirements, as long as they're higher than the CIRO minimums.
Trading on margin gives you more buying power, allowing you to take advantage of market opportunities you might have otherwise missed. With a margin account, you can also withdraw funds against your assets as long as there is available margin to do so. This works similarly to a secured line of credit, using your securities as collateral — often at lower rates than other types of loans. Withdrawn money is not taxed, and the interest charged may be tax-deductible.
In addition to more traditional investment products, margin accounts also allow you to use more sophisticated strategies like trading complex options or short-selling.
That said, trading on margin comes with higher risk. If the value of your investment decreases, your losses are magnified and you can lose more money than your initial investment.
You can also be subject to what's called a margin call. A margin call is a demand from your broker to fund your margin account. Margin calls occur if you have purchased securities on margin and the value of your account falls below the maintenance margin — a term for the minimum buying power required in your account at all times.
If this happens, you're responsible for bringing your account balance up to the minimum within a specified time, either by transferring more money into your account or selling securities. If you fail to meet the margin call, or if extenuating circumstances exist, your brokerage can sell your securities.
You'll have to apply for access to a margin account and be able to demonstrate you're able to pay back amounts borrowed.
Pros and cons of a margin account
Margin accounts offer more flexibility and power, but they come with additional complexity and risk.
Advantages:
Greater buying power: you can invest more than the cash you have on hand, potentially increasing your returns.
Access to advanced strategies: margin accounts let you short sell and trade complex options.
Flexible cash access: you can withdraw funds against your portfolio, similar to a secured line of credit, often at lower interest rates than unsecured loans.
Potential tax benefits: interest charged on margin loans used for investing purposes may be tax-deductible.
Disadvantages:
Amplified losses: borrowing magnifies losses — you can lose more than your initial investment.
Margin calls: if your account value drops below the maintenance margin, you'll be required to deposit more funds or sell securities, sometimes on short notice.
Interest charges: you pay interest on borrowed funds, which reduces your net returns over time.
Higher complexity: margin accounts require more active monitoring and a stronger understanding of market risk.
Key differences between a margin account and a cash account
Feature | Cash account | Margin account |
|---|---|---|
| Funding | Your own cash only | Your cash + borrowed funds |
| Buying power | Limited to deposited cash | Amplified by margin lending |
| Risk level | Lower — losses limited to amount invested | Higher — losses can exceed initial investment |
| Margin calls | None | Possible if account drops below maintenance margin |
| Interest charges | None | Yes, on borrowed amounts |
| Short selling | Not allowed | Allowed |
| Complex options | Not allowed | Allowed |
| Best suited for | Buy-and-hold investors, beginners | Active traders, experienced investors |
Let's say you have $3,000 to invest in a promising stock that you think is going to increase in value soon.
Scenario 1: Stock price goes up
In a margin account: If you were to invest that $3,000 in a security with a 50% margin requirement, you would have a total buying power of $6,000, meaning you could purchase up to $6,000 of that security. If the stock price increased by 5%, you'd see a return of $300. After selling the stock and paying back the money you borrowed, you'd net $300 minus any interest you owed on the loan.
In a cash account: You wouldn't be able to borrow the additional $3,000 from the brokerage, and could only invest your original $3,000. After investing your $3,000, you'd walk away with a profit of $150.
Scenario 2. Stock price goes down
In a margin account: If the stock price decreases by 5%, the value of your investment would drop to $5,700. If you sold, you'd pay back the loan ($3,000) and be left with $2,700, a loss of $300 plus any interest you owe on the loan. If these were the only funds in your account, you'd also be in a margin call.
In a cash account: The value of your investment would drop to $2,850 and you would have a loss of $150.
How to choose between a margin account and a cash account
Whether to open a margin or a cash account depends on what kind of investor you are. Before deciding, you should consider your investing experience, risk tolerance, and cash flow.
Investing experience: if you're new to trading, cash accounts may be a better fit for you than margin accounts because they're less complex and come with less risk (though of course more experienced investors like cash accounts, too).
Trading strategy: cash accounts tend to work for buy-and-hold investors because they help you avoid the significant losses that can occur in margin accounts due to leverage and market volatility. If you're someone who likes to trade more actively and has plenty of stock market experience, margin accounts may be more appealing.
Risk tolerance: margin accounts can offer the potential for greater returns, but they carry a higher risk profile. If you're interested in trading on margin, you should be comfortable with the level of risk that comes with it. Risk-averse? You might want to look into a cash account.
Cash flow: be honest with yourself about whether you have surplus cash available to cover an unexpected margin call. If you don't, or you prefer to invest on a regular schedule, such as monthly or annually, a cash account is likely a better fit.
