Is Margin Trading More Profitable Than Cash Accounts? What’s the Difference?

Financial trading keeps expanding, with more providers and brokers offering advanced services to explore market positions and investment opportunities.

Trading with leverage is a common practice for risk-taking investors and skilled traders aiming to amplify profits at amplified risks. On the other hand, beginners are more likely to trade with their balance, which is the main difference between margin and cash trading accounts.

Let’s take a quick look at trading with margin and cash; what are the main differences, and which one suits you more?

Cash Trading Accounts: Safer Option for Risk-Averse

Cash accounts entail the simple order placement using the balance available in the trader’s account. It is a more straightforward approach and the default account setting at most brokerage firms, where users deposit their money and the funds to finance their market orders.

Trading with a cash account is more convenient for new traders because it does not involve borrowing or using the broker’s funds. 

As a result, all gained profits and incurred losses are set off in the trader’s balance sheet, making it easier to track and analyse one’s trading portfolio and activities. The only extra costs associated with this type of account are the transaction fees and the spread charged by the broker.

Margin Trading Accounts: Higher Potential for Risk-Takers

Margin accounts enable traders to discover more valuable positions by placing orders that exceed their financial capacity. Margin trading involves borrowing, which is the amount of money the broker adds to fund a large market order, anticipating a greater profit in return.

This option entails borrowing money from the broker to execute high-value trades as a percentage of the total order amount. For example, if the broker offers 1:100 leverage, it means the trader can use $100 to execute market orders at $10,000, whereas the remaining amount is funded by the broker.

If the trade moves positively in favour of the investor, they earn magnified profits they would not be able to achieve with their $100 alone. Consequently, the trader uses the realised gains to pay off the loan to the broker.

The Downside of Margin Accounts

The major disadvantage of margin accounts lies in the associated risks. If the trade moves sideways and the market position loses, the investor becomes heavily indebted to the broker. As a result, their margin account may go in the negative and, eventually, default.

Additionally, the broker will ask the trader to keep a fixed amount in their margin account to minimise the risk of bankruptcy as collateral if the market moves unexpectedly. This margin requirement puts another burden on the investor to deposit and hold more money as a guarantee.

Conclusion

Both margin and cash accounts have pluses and minuses and are largely used among different types of investors to place market orders.

Cash accounts are simpler to use and are recommended for those who want to dip their toes in the waters of financial trading, while margin accounts are mostly used by experienced traders who have the knowledge and capital to expand their trading positions.