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Marginal Account vs. Cash Account
What is a Marginal Account?
Marginal accounts allow investors to borrow money by putting securities they buy as collateral which can be used to buy more securities or for other purposes.
The investor’s status of securities can also be viewed by a broker in the case of a marginal account. These accounts are often used by options investors who need to show collateral while shorting the options.
With a marginal account, if the investor buys securities that cost more than the balance in the account, the broker automatically pays for the extra amount. Therefore, marginal accounts have an option for credit which is unavailable in cash accounts.
Marginal account holders are barred from completing application forms or other forms; they just need to open the marginal account and everything else is taken care of by the broker.
The money that is loaned against securities remains as a debit balance in the marginal account. This balance is owed to the broker and interest charges are levied on this amount. No loan payment is needed to be made unless the balance reaches a limit of a lower level.
The debit balance in all other circumstances stays in the account. The money keeps accruing each month and is paid back when securities get sold or new investment comes into the account.
What is a Cash Account?
Cash accounts are used by investors to deposit money and purchase securities. There is no special other provision in cash accounts.
In the case of cash accounts, all of the purchases of securities are done with cash. So, there must be enough cash in the account to purchase the intended amount of securities in the case of cash accounts. The securities in a cash account cannot be utilized as collateral for getting credit from the broker.
Cash accounts run in an as-is fashion. The holder of the cash account must deposit the required amount of cash before purchasing securities. As there is no option of loans, the cash account holder cannot exceed the available amount of deposited money while purchasing securities.
There is no minimum investment amount in the case of cash accounts. The investors can deposit as much money in the accounts as they wish and start using it for purchasing the securities.
Long options are available in the case of cash accounts with prior approval of the broker, but uncovered short and spread positions are not allowed.
Key Differences Between Marginal and Cash Accounts
| Sr. No. | Based on | Marginal Accounts | Cash Accounts |
|---|---|---|---|
| 1 | Investment Requirements | There is a minimum investment requirement in the case of marginal accounts. | Cash accounts do not need any minimum deposit. |
| 2 | Risks | The risks in the case of marginal requirements are higher. | The risks in the case of cash accounts are lesser. |
| 3 | Potential Returns | As is obvious, the potential returns in the case of marginal accounts are higher. | It is a direct result of the risk-return trade-off. |
| 4 | Borrowing | The marginal account allows borrowing against the securities deposited in the marginal account. The cash account is not entitled to any credit. | The investors of cash accounts have to deposit money to buy securities worth the deposited money. |
| 5 | Purchasing with firm approval | The marginal account holders can purchase securities worth more than the deposited amount with prior approval of the broker. | This service is not available in the case of cash accounts. |
| 6 | Selling of uncovered options | Selling spreads or uncovered options are allowed in the case of marginal accounts. | Cash accounts do not have this option. |
| 7 | Debit balance | The marginal account holders can have a debit balance in their accounts. | The cash account holders cannot enjoy this feature. |
Conclusion
Lastly, basically, it can be concluded by saying simply that the broker can monitor the loan balances in a marginal account. Whereas, for all brokers, the default type of accounts is cash accounts.
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