Cash Account vs. Margin Account: What's the Difference?
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 accountThis 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 accountIn 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 accountThis 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 accountHey! We don't counsel against this one! Check out our handy guide for tips on how (and why) to open a basic IRA. Bottom line: IRAs can save you a ton of money on taxes if you use them right.
Which brokerage is right for you?
As you probably know, there are many stock brokers to choose from and each offers something a little bit different. Take a look at our best online stock brokers page to read our reviews and ratings of each broker to see which one is right for you.