Cash Account vs. Margin Account: What's the Difference?

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If you're left a bit baffled by the differences between brokerage accounts, never fear: Here's a quick rundown of what they are and what they do.

Cash account
This type of account asks you to deposit cash, and then you can use that cash to buy stocks, bonds, mutual funds, or other investments. It's not much more complicated than that.

Margin account
In a margin account, the cash and securities in your account act as collateral for a line of credit that you take out from the brokerage in order to buy more stock. The interest rates that brokers charge are lower than typical credit card rates, but they do mean you'll need to earn a much higher return on your investments than you would if you were only investing with your own cash. We generally counsel against using margin, but that doesn't mean that getting a margin account is automatically a bad idea.

Option account
This type of account allows you to trade options, which is a much riskier business than stocks. In general, we believe most investors don't need to trade options, although again, having an account that allows you to trade options isn't automatically bad.

IRA account
Hey! We don't counsel against this one! Check out our handy 60-second guide for tips on how (and why) to open a basic IRA. Or if you want all the nitty-gritty details on the different kinds of IRAs, see our four-step guide.

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Comments from our Foolish Readers

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Report this Comment On March 08, 2011, at 11:28 AM, hmacphail wrote:

Hi
I've just been invited into MF Options Trading, which I am quite keen on but how does that square with the statement below?
'This type of account allows you to trade options, which is a much riskier business than stocks. In general, we believe most investors don't need to trade options...'