Cash vs. Margin Account
Investors can open a cash account to trade stocks, ETFs, mutual funds, etc. However, when you buy or sell securities in a cash account, it usually takes 2 business days for the transaction to settle.
“Settlement” is set by federal securities regulations and refers to the official transfer of the securities to the buyer’s account and the cash to the seller’s account. The settlement period is 2 business days after the trade date for stock transactions and 1 business day after the trade date for option transactions.
There are cash account rules that investors need to follow while trading in a cash account. Transactions involving unsettled funds can sometimes lead to a Good Faith violation and a 90-Day Restriction for the account. Trading using margin privileges can help you avoid such violations.
A margin account allows you to borrow cash from Firstrade to purchase securities. The loan in the margin trading account is collateralized by the securities you purchase. While you hold securities using margin, if the value of the stock drops significantly, the account holder will be required to deposit more cash, more marginable securities, or sell a portion of the securities to maintain the minimum margin requirements.
You may also trade in a margin account with your own cash. No extra interest or fees will be charged if you do not borrow money from Firstrade or exceed your cash balance. Trading in a margin account would allow you to use unsettled funds; this will avoid all the settlement date related violations that could happen in a cash account.
Certain trading behaviors are allowed only in margin accounts, such as; short-selling, day-trading, and advanced option strategies. Trading in a margin account provides you the ability to leverage your investments and increase the return when the price of your holdings moves in your favor.
To begin investing utilizing margin:
- STEP 1: Make sure you understand the risks and benefits of using margin.
- STEP 2: Have at least $2,000 of assets in your account.
- STEP 3: Complete the Margin Application & Agreement and send it to Firstrade by fax, email or mail.
- STEP 4: Once your margin account is approved, you can start enjoying the benefits and flexibility of margin borrowing.