The fundamentals of trading are simple: you buy an asset with the money you have and sell it at a higher price to get some profit. However, the increasing number of traders and services opened the door for new solutions to emerge.
Margin trading is similar to traditional buying and selling but with a twist! With a margin account, you can borrow funds from the broker to place market orders at higher values and get higher returns. This approach is also called leverage trading.
Experienced investors use margin trading to multiply their gains. However, trading with margin comes with several risks that we will explain in the following.
What is a Cash Trading Account?
Cash trading is simply executing buy orders using the money you have in your balance, which is available in your account as equity. It is a straightforward approach which most traders prefer, especially rookies who want to get started tentatively in financial markets.
However, selling with a cash account is only possible when a trader has the underlying stock or assets in their account. For example, if a trader wants to sell (short) stocks, they must be available in their account.
The Benefits of Cash Accounts
Cash accounts are easier to understand without having to borrow funds or become indebted to the broker. This account is suitable for new traders with limited capital.
What is a Margin Trading Account?
Margin refers to the ability to borrow funds and place higher-value market orders. This way, traders can explore opportunities for amplified gains at amplified risks.
Leverage trading with margin is a risky approach because if the market moves against the trader’s will and the margin account defaults, the investors become indebted to the broker. Moreover, the broker may liquidate any available assets in the trader’s account to compensate for the losses.
The Benefits of Margin Accounts
Wealthy traders prefer margin accounts because they have enough capital to tolerate exaggerated risks. Moreover, if the leveraged market order goes in the trader’s favour, they can make substantial gains.
Conclusion
Choosing between a cash or margin trading account depends on several factors, like the trader’s experience, available capital and risk tolerance. Cash accounts are easier to deal with, implying buying assets with the available equity. On the other hand, margin accounts are used to explore amplified gain opportunities. Yet, they come with amplified risks, so do your research, measure risks, and choose the account type that will suit you.
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