Lesson Cash 101
Discover the difference between a Cash account and Margin account and find what’s best for you.
As you start investing, you’ll inevitably encounter an important choice: choosing the right type of account. Among many options, non-registered accounts attract investors due to their flexibility which comes from having no contribution and withdrawal limits. Within non-registered accounts, there’s two major accounts namely Cash accounts and Margin accounts.
Cash accounts
A cash account is a non-registered investment account suitable for most investors, especially those who maxed out their registered accounts' contribution room. With a cash account, you invest using the money you deposit, without the ability to borrow additional funds. This means any purchases you make will be from the available cash in your account. This straightforward approach makes a cash account a great option for investors looking to invest securely within their means.
Margin accounts
A Margin account allows investors to borrow funds from a brokerage to purchase securities. This borrowing capability, known as buying on a margin, provides you the opportunity to increase your buying power beyond the available cash you have in the account. While this can potentially increase your returns, it also exposes you to higher risk of loss.
What are the major differences between Cash and Margin accounts?
Leverage
The biggest difference between a Cash and Margin account is leverage. Leverage in investing means you can borrow money in your account to buy more securities than you could with just your available cash. With a Margin account, you’re able to leverage and expose yourself to more trades than your cash at hand. In contrast, a Cash account do not offer this option— you can only invest the money you have available in the account.
Level of Risk
Cash accounts typically have lower risk since you're not exposed to the risks of borrowing, such as margin calls or increased losses. Margin accounts, because of the option to borrow and leverage more money, comes with higher risk.
Trading Opportunities
Margin accounts offer more investment strategies, such as short selling and complex options trading, which are not available in Cash accounts. This makes Margin accounts more suitable for experienced investors.
Interest Charges
Since you can’t borrow funds from a Cash account, you don’t incur any interest charges. With a Margin account, you may incur interest charges on the funds you borrow.
Choosing between a Cash and Margin account
Choosing between a Cash or Margin account depends on your risk profile, investment style, experience, and goals. Cash accounts, because of their simplicity, can be suited for investors who are more conservative and are just starting to build their portfolio. They offer less risk because you’re not exposed to borrowing and more complicated trading opportunities.
In contrast, Margin accounts provide more flexibility and the potential for higher returns due to leveraging and trading options. Because of this, they can carry more risk and complexity, making them more appropriate for experienced investors.
Ultimately, understanding these key differences is vital so you can make informed and empowering investment decisions in your investment journey.
Open a Cash account
Start investing today with a Cash account.
Open a Margin account
Start investing today with a Margin account.
Note:The information in this blog is for educational purposes only and should not be used or construed as financial or investment advice by any individual. Information obtained from third parties is believed to be reliable, but no representations or warranty, expressed or implied, is made by Questrade, Inc., its affiliates or any other person to its accuracy.
