Cash Accounts and Margin Accounts: Things to Know

Cash accounts and margin accounts are two different account types between which you will have to choose. Check out the key information you need to know before picking one.

Cash Account

When you use a LBLV Forex Broker cash account, all of your transactions must be done with the current available cash or long positions. When you’re buying securities using  a cash account, you must deposit cash to settle the trade or sell an existing position on the same trading day, thus the cash proceeds are there to settle thr “buy” order.

Margin Account

On the flip side, a margin account lets you borrow against the value of the assets in the account to buy new positions or sell short. This way, an investor can use margin to leverage his positions and profit from both the bullish and bearish moves in the market. Margin can also be used make cash withdrawals against the value of the account as a short term loan.

If you are seeking Forex Broker List to leverage your position, a margin account can be very useful and cost effective. When there’s a margin balance or debt, the outstanding balance is subject to daily interest rate charged by the firm. Such rates are based on the present prime rate plus an additional amount that is charged by the lending firm and can run as high as 10 percent.

Taking Short Positions Using a Margin Account

If you have a margin account, you may take a short position in stock A if you believe that its price is likely to fall. If the price does fall, you can cover your short position at the time by taking a long position in stock A.

Therefore, you earn a profit on the difference between the amount you receive at the initial short sale transaction and the amount you paid to buy the shares at the lowered price, minus your margin interest charges over that period of time.

Hedging with a Cash Account

If you’re a bearish investor using cash account, you must find other strategies to hedge or produce income on your account since you must use cash deposits and long positions only.

For instance, you may enter a stop order to sell stock A if it falls below a certain price, which limits your downside risks.

Margin and Margin Call

Margin accounts must maintain a certain margin ratio at all times. If the account value slips lower than the limit, you will be issued a margin call, which is basically a demand for deposit of more cash or securities to bring the account value back within the limits.

The client can add new cash to your account or sell some of your holdings to raise the cash. Margin privileges are not offered on individual retirement accounts since they are not subject to annual contribution limits, which affect the ability to meet the margin call.

The securities in your margin account may be lent out to another party, or even used as collateral by the brokerage firm at any time without notice or compensation to you, when there is a debt balance or negative balance on the account where you have accessed the margin funds.