Cash Account vs Margin Account: Differences, Rules and Which to Choose

The main differences at a glance

Both are brokerage accounts that can hold stocks, ETFs, bonds and funds. The difference is whether your broker can lend you money, and with that loan come extra rules and extra risk.

How a cash account works: settled funds and T+1

In a cash account you must pay for every purchase in full. Payment is due by settlement, and since May 28, 2024, most US securities trades, including stocks and ETFs, settle on T+1: one business day after the trade.

Settlement also matters when you sell. If you sell a stock on Monday, the money from that sale settles on Tuesday. These trades are fine, based on the SEC's own examples:

• You have $10,000 of settled cash, buy $10,000 of a stock on Monday and sell it the same day. Allowed, because you paid with money that was already there.
• You sell $10,000 of a stock you fully own on Monday and buy another stock with that money on Friday. Allowed, because the sale settled on Tuesday.
• You sell stock A and buy stock B on Monday, then sell B on Friday. Allowed, because you didn't sell B before the sale of A settled.

A cash account has no day trade count. You can buy and sell the same day as often as you like, as long as each purchase is paid with settled money.

Freeriding and good faith violations

Freeriding means buying and selling a security before paying for it. The SEC's example: you sell $10,000 of stock A and buy $10,000 of stock B on Monday, then sell B that same afternoon without adding cash. The purchase of B relied on money from A that hadn't settled, so selling B before Tuesday is freeriding.

Under the Federal Reserve's Regulation T, freeriding can force your broker to freeze your account for 90 days. During a freeze you can still trade, but you must pay in full on the trade date for anything you buy. You avoid the freeze if you pay for the purchase by the settlement date with money that doesn't come from selling that same security.

Many brokers call this kind of slip a good faith violation, a broker term rather than a term defined in Regulation T. How many violations your broker tolerates, over what period, and what restriction it applies are company policies, so read your broker's rules. The simple habit that avoids all of it: before you buy, check that you're using settled cash, which most platforms show separately from your total balance.

How a margin account works: the 50%, 25% and $2,000 rules

In a margin account, your broker lends you money using the securities in your account as collateral. Three numbers set the minimum rules:

• 50% initial margin (Regulation T): you can borrow up to 50% of the purchase price of margin-eligible stocks. To buy $10,000 of stock, you put up at least $5,000.
• $2,000 minimum (FINRA): to trade on margin you need at least $2,000 of equity, or 100% of the purchase price if it's less. With less than $2,000 you can only trade with your own cash.
• 25% maintenance (FINRA): after buying, your equity (the value of your securities minus your loan) must stay at or above 25% of their market value. Under FINRA's new intraday margin rules, in effect since June 4, 2026, it must also hold during the trading day; brokers have until October 20, 2027 to adopt them.

These are minimums. Brokers can set stricter house requirements, often 30% to 40% for maintenance, raise them at any time without advance notice, and refuse to lend on some securities.

Margin also costs money: you pay interest on the loan for as long as you hold it, and rates vary by broker and by how much you borrow. With a hypothetical 10% annual rate, borrowing $5,000 for a year would cost about $500, which comes out of your returns.

Leverage cuts both ways. Buy 200 shares at $50 ($10,000) with $5,000 of your own money: if the price rises to $60, your equity grows from $5,000 to $7,000 (+40%, versus +20% with cash). If it falls to $40, your equity drops to $3,000 (-40%, versus -20%), before interest.

Margin calls: a worked example

A margin call is your broker's demand that you add money or securities, or sell, because your equity fell below the requirement. Continuing the example, you hold 200 shares bought at $50 with a $5,000 loan, and your broker uses FINRA's 25% minimum:

At $32 you're $200 short. You can deposit $200 in cash or sell stock. Selling takes more than $200: FINRA's formula is the call divided by the requirement, so $200 ÷ 0.25 = $800 of stock. If your broker's house requirement is 30%, the call starts sooner, at about $35.71 a share.

What surprises many people:

• Your broker doesn't have to warn you before selling, and you don't get to choose which securities it sells.
• You're not entitled to an extension of time.
• In a sharp drop you can lose more than you deposited and end up owing the broker money.

Short selling and options

Short selling requires a margin account. FINRA notes it's the only type of account where you can sell short, because your broker lends you the shares. Shorting comes with interest on the borrowed shares, the duty to pay any dividends to the lender and, in theory, unlimited losses, since a stock's price has no ceiling.

Options need a separate approval. Your broker must approve you before you trade options, based on your objectives, experience and finances. Most firms use about five levels, from lowest to highest risk, and the details vary by firm. In general:

• In a cash account, Regulation T only allows selling options as part of a covered position, such as a covered call. Options you buy must be paid in full.
• Spreads and selling uncovered options usually require a margin account and a higher approval level.

Which account suits a beginner

For most people starting out, a cash account is the safer choice: you can't lose more than you put in, there are no margin calls or interest, and the only rule to master is using settled funds.

A margin account can make sense later, when you need it for a specific reason, such as short selling, certain options strategies, or not having to wait for settlement, and when you already have a tested trading plan. Having margin approved doesn't oblige you to borrow; what matters is that your position size comes from your risk calculation, not from the buying power your broker shows you.

If you want to day trade, read the pattern day trader rule guide too: FINRA replaced that rule in 2026, but your broker may still apply it during the transition. Margin rates, minimums and house requirements vary a lot between brokers, so compare them before choosing; see how to choose a broker.