Brokerage accounts where you trade stocks, bonds, exchange-traded funds (ETFs) or cryptocurrency can be set up as cash or margin accounts. As an investor or trader, it is important to understand the difference between cash and margin accounts. Webull offers account holders the option for both types of accounts.
A cash account requires you to pay the full cost of any security or asset, usually immediately or within three days, with money deposited in the account by you or earned by profitable stock sales. In contrast, margin accounts let investors borrow from the broker to purchase assets. By buying on margin – using borrowed money – investors can acquire more securities than they might otherwise be able to buy with their own cash. This kind of leverage offers the potential for you to increase your returns over time more than if you were confined to using your own cash. However, in a margin account, you can also end up losing more than your initial investment. Although cash accounts limit your opportunities to your own funds, they are considered less risky.
This article will enable you to better understand the difference between margin and cash accounts at Webull and help you make the best choice for your situation.
- What is a Cash Account?
- What is a Margin Account?
- About Webull
- See All 5 Items
What is a Cash Account?
Cash accounts require transactions to be made via cash in the account or proceeds from the sale of stocks held in the account. A cash account at Webull lets you buy assets using the cash you’ve deposited in the account.
Pros
- Less risk: Cash account investors have the peace of mind that comes from knowing they can’t lose more than their initial investment. For instance, if you deposit $1,000, you can only use and lose up to $1,000.
- Accessibility: With a cash account, you have instant access to your money.
Cons
- Profit limits: Limit on possible revenue based on only being able to trade with money you’ve deposited in the account.
- Diversification issues: Reduced diversification from investor’s lower investment level.
- No leverage: Miss out on the benefits of leverage.
What is a Margin Account?
A margin account at Webull allows you to borrow against the value of assets in the account to purchase new positions or sell short. Webull investors can use margin to leverage their positions and profit from both bullish and bearish moves in the market. Margin can also be used to make cash withdrawals against the value of the account in the form of a short-term loan.
Additionally, you can participate in Webull’s share lending program in a margin account. If you give the brokerage firm permission, your shares can be lent out to other interested parties such as sellers and hedge funds, earning interest. The process is described as share lending or securities lending.
If you accept, your broker then lends out these shares to short sellers or hedge funds at a slightly higher rate. For example, your broker may give you 8% on interest on the loaned shares while lending it out at 13%. Depending on the size of your position, you could earn additional return especially if the security moves upwards.
Pros:
- Amplify profits: A margin account with Webull can increase returns by letting you buy securities with borrowed money. But margin accounts can also amplify losses.
- Potential to increase gains: You tap into more potential to enhance your gains because you can borrow money to trade more stocks.
- Maximize short-term cash flows: Except for interest charged on the money you borrow, you pay no additional fees to maintain a margin account.
- Options: You can actively buy and sell options.
Cons:
- Risk of forced sale: If assets in a margin account drop in value to near the amount of money owed, a broker will typically require the investor to put in more cash. If the investor can’t or won’t, the broker will sell shares at the current price.
- Risk of losing principal: Margin accounts are much riskier than cash accounts because you can lose your own money as well as the money you borrowed.
- Interest payments: Money borrowed from a brokerage requires that you pay interest.
About Webull
Webull, a leading developer of financial analytics, synergizes technology and finance. The company's online brokerage platform employs a global data system that provides real-time data and news from different countries, exchanges, categories and underlying targets, enabling investors to trade on global exchanges commission-free.
Webull’s Cash and Margin Account Are Suited to all Types of Investors
Ultimately, deciding which type of brokerage account at Webull is best for you depends on the level of risk you’re willing to tolerate and your knowledge about different trading strategies. More experienced investors who have mastered speculative trading may be comfortable with and able to profit from a margin account by selling stocks short. And while there is more risk involved, there is also more flexibility if you can deal with unexpected price swings.
For those who prefer greater safety, trading with a cash account is probably a better option. It offers more financial stability and can help you step into the world of investments in a much safer way.
Be sure to come back to Benzinga for more information on various accounts and how you can benefit from them using platforms such as Webull.
Frequently Asked Questions
Is a margin account a good idea?
A margin account increases purchasing power and allows investors to use someone else’s money to increase financial leverage. Margin trading offers greater profit potential than traditional trading but also presents greater risks. Purchasing stocks on margin amplifies the effects of losses.
Is a cash account safer than margin?
Yes. By buying on margin, investors can acquire more securities and potentially increase returns. They can also lose more, up to and more than the initial investment. Cash accounts offer opportunities for more limited profits but are less risky.
About Henri Kouam
Henri Kouam is an economist and machine learning enthusiast. He currently builds Machine Learning models to help clients across Europe forecast a range of asset classes such as cryptocurrencies while working with, the Nkafu Policy Institute, an African-based think tank to help inform economic policy. He equally works as a consultant for NY-based ”Global Wonks”, where he has named wonk of the week twice due to his actionable intelligence on North America.