Sam has the application for Broker A open. Name, address, employment, bank details, all easy. Then a single line with two boxes: "Account type: Cash / MarginMargin is money borrowed from your broker, secured by the cash and securities in your account, that lets you hold a larger position than your own cash would allow. For example, with the standard 50% initial margin, $10,000 of equity can buyRead definition →." Margin is already ticked.

He remembers the margin interest table from Lesson 16: Brokerage Costs, and the note in his own notebook from Lesson 10: "I'm in cash. My only limit is settlement." Before he leaves the box ticked, he wants to know what it actually changes.

This lesson explains the difference, the rules that come with each account, and how a beginner should choose.

In 30 seconds

  • In a cash account you pay in full for everything you buy; in a margin account you can borrow from your broker, using your account as collateral, and pay interest on the loan.
  • A cash account's main limit is settlement: US stock trades settle one business day after the trade (T+1), and selling a stock before you've paid for it with settled money breaks the freeriding rule, which can freeze the account for 90 days.
  • A margin account adds leverage, Short SellingShort selling is borrowing shares from a broker and selling them at the current price with the intention of buying them back later at a lower price — profiting from the price decline, but with theoretically unlimited loss potential if the sRead definition → and faster reuse of money, but also margin calls, interest, and losses that can exceed what you deposited. Trading on margin needs at least $2,000.
  • For most beginners learning with a small account, a cash account is the safer place to start.

By the end of this lesson you'll know how cash and margin accounts work, what settlement means for your daily trading, what a margin call is, and which account fits where you are now. If you need the background on the old pattern day trader rule, start with Lesson 10: The PDT Rule Explained.

What is the difference between a cash account and a margin account?

A cash account is a brokerage account where you must pay the full price of every purchase with your own money. A margin account lets you borrow from your broker to buy securities, with the securities in the account as collateral for the loan (Investor.gov).

Think of a debit card and a credit card. With a debit card you spend what's in your account, and when it's gone, you stop. A credit card lets you spend more than you have, but you pay interest, there's a limit, and the bank can act if you fall behind.

Cash account
Paying for trades
Margin account
Full price, with your own money
Cash account
Main limit
Margin account
Settled cash
Cash account
Short selling
Margin account
No
Cash account
Interest
Margin account
None
Cash account
Margin calls
Margin account
None
Cash account
Can you lose more than you deposit?
Margin account
Generally no
Cash account
Minimum to trade on margin
Margin account
Not applicable

How the two account types compare. Your broker's own rules may be stricter.

Cash keeps you inside your own money; margin adds borrowing, shorting, interest and margin calls.

How does settlement limit a cash account?

Settlement limits a cash account because money from a sale isn't yours to reuse until the trade settles, one business day later. Since May 28, 2024, most US stock trades settle on T+1: sell on Monday and the trade settles on Tuesday (Investor.gov).

In practice, if you buy and sell on the same day, each dollar of settled cash backs about one round trip per day. Buy with settled cash, sell later the same morning, and those proceeds stay unsettled until the next business day.

Under T+1, a Monday sale settles Tuesday, so track settled cash before you reuse it.

This is why Lesson 3 found that Sam's $6,000 supports about one full-size trade a day in a cash account. For a beginner, that limit is less of a problem than it sounds. One or two careful trades a day is plenty while you're learning.

What is freeriding, and how do you avoid it?

Freeriding is buying and selling a security in a cash account before you've paid for it. It breaks the Federal Reserve's Regulation T, and the usual result is a 90-day freeze: you can still buy, but only if you pay in full on the day of the trade (Investor.gov).

Here's how it happens. On Monday you sell stock ABC, and the money won't settle until Tuesday. Still on Monday, you use that unsettled money to buy XYZ. If you then sell XYZ on Monday as well, before ABC's money has settled, you've sold something you hadn't yet paid for. Investor.gov's cash account bulletin uses this same kind of example (Investor.gov).

The habit that prevents it is simple: buy only with settled cash. Most broker platforms show settled cash separately from buying power, which is why Sam ranked Broker A higher in Lesson 14.

How does a margin account work for day traders?

A margin account lets you buy more than your cash covers by borrowing from the broker. Under the Federal Reserve's Regulation T you can generally borrow up to 50% of the purchase price, and FINRA requires at least $2,000 in the account, or the full purchase price if that's less, before you trade on margin (Investor.gov).

That borrowing is called leverage. It makes gains bigger and losses bigger by the same amount. With $6,000 of your own money and a 50% loan, you could hold a $12,000 position. A 5% drop then costs $600, which is 10% of your own money instead of 5%.

Margin also changes day trading in two practical ways:

  • Less waiting for settlement. Because the broker can lend against the account, margin accounts can usually reuse sale proceeds sooner, within the margin rules.
  • Short selling. Shorting means borrowing shares to sell, and Investor.gov notes that short positions are subject to margin rules and interest (Investor.gov).

The old pattern day trader rule and its $25,000 minimum applied only to margin accounts. FINRA has replaced it with intraday margin standards, which took effect on June 4, 2026, with firms allowed to phase them in until October 20, 2027 (FINRA). Under the new standards, a shortfall that builds up during the day is an intraday margin deficit, and you're expected to cover it by depositing money by the end of the next business day. A customer who makes a practice of not covering these deficits can be restricted for 90 days. The PDT rule elimination guide tracks the full timeline.

What is a margin call?

A margin call is a demand from your broker to add money or securities because the equity in your margin account has fallen below the required level. FINRA's maintenance requirement is at least 25% of the market value of your securities, and many brokers set it higher, often 30% to 40% (Investor.gov).

The part beginners don't expect: Investor.gov warns that your broker may not be required to make a margin call or tell you that your account has fallen below its requirement, and may be able to sell your securities at any time without consulting you first. Because you've borrowed, you can also lose more than you deposited.

Here's a simple illustration. Say you own $12,000 of stock with $6,000 of your money and a $6,000 loan. If the stock falls 30% to $8,400, your equity is $8,400 minus the $6,000 loan, or $2,400. At a 30% house requirement, the broker wants $2,520. You're below it, so you get a margin call, or the broker sells for you.

Start
Market value
After a 30% drop
$12,000
Start
Loan from broker
After a 30% drop
$6,000
Start
Your equity
After a 30% drop
$6,000
Start
Requirement at 30%
After a 30% drop
$3,600
Start
Status
After a 30% drop
Fine

Illustrative example with a hypothetical 30% house requirement.

The same 30% drop in a cash account costs $1,800 of a $6,000 position. In the margin account it costs $3,600, and the broker may sell at the worst moment.

Should a beginner day trader choose cash or margin?

Most beginners learning with a small account should start with a cash account. It removes the risk of borrowing, margin calls and losses beyond your deposit, and its one real limit, settlement, rarely matters when you're taking one or two careful trades a day.

A margin account makes sense later, for a specific reason, once you have a tested plan and firm risk rules.

Your situation
Learning, small account, one or two trades a day
Better fit
Cash
Why
Settlement is enough room, and you can't lose more than you deposit
Your situation
You want to short stocks
Better fit
Margin
Why
Shorting works under margin rules
Your situation
You want to reuse the same money for several trades a day
Better fit
Margin
Why
No wait for settlement, but leverage risk comes with it
Your situation
You hold positions overnight with borrowed money
Better fit
Margin
Why
Expect margin interest on the loan
Your situation
You're not sure yet
Better fit
Cash
Why
You can usually apply to add margin later

A starting guide. Your broker's terms may differ.

Whichever you choose, size every trade from your own money and your risk rules. The buying power your platform shows is a ceiling to stay well under. Lesson 52: Position Sizing shows how.

Why does Sam choose a cash account?

Sam unticks "Margin" and ticks "Cash". Here's his reasoning, written in his notebook (hypothetical).

Question
How many trades a day will I take?
Sam's answer
One, maybe two, in my 9:45 to 11:30 window
Question
Does settlement limit that?
Sam's answer
No. $6,000 settled covers one 80-share XYZ trade with room to spare
Question
Do I plan to short?
Sam's answer
Not this year
Question
What could margin cost me?
Sam's answer
Interest if I hold overnight, and losses bigger than my deposit
Question
What's my biggest risk?
Sam's answer
Impatience. Margin would make it more expensive

The account is approved the same week. He leaves it unfunded for now: his $6,000 of tuition money stays in savings until he's paper traded properly, which comes in Module 9.

On the first page of his trading notebook he writes: "Cash account. Settled money only. Borrowing is a tool I haven't earned yet."

Treating buying power as money to use

You're doing it if
Your platform shows buying power twice your cash and you size trades to use all of it, or you buy with unsettled proceeds in a cash account and plan to sell the same day.
The fix
Size every trade from your own settled money and your risk rules. In a cash account, buy only with settled cash; in a margin account, treat the extra buying power as a limit, never a target.

Your turn: check your account type (10 minutes)

0 of 5 done

Check your understanding

Check your understanding

In a cash account, you sell ABC on Monday and use the unsettled money to buy XYZ the same day. When can you safely sell XYZ?

Check your understanding

You hold $12,000 of stock with $6,000 of your own money in a margin account. The stock falls 5%. What happens to your equity?

Check your understanding

Which statement about margin calls is true?

Key takeaways

  • Cash accounts use only your money; margin accounts add a loan, interest and margin rules.
  • Under T+1, sale proceeds settle the next business day, so buy only with settled cash to avoid freeriding.
  • Leverage multiplies losses as well as gains, and a broker can sell your positions without warning in a margin call.
  • The $25,000 pattern day trader minimum is gone, but intraday margin standards and house rules still apply to margin accounts.
  • Start in cash while you learn, and add margin only for a specific reason backed by a tested plan.

Frequently asked questions

What's the difference between a good faith violation and freeriding?
Both describe selling a stock in a cash account before it's been paid for with settled money. "Good faith violation" is a label many brokers use for the case where you buy with unsettled proceeds and sell before they settle, and brokers set their own penalties for repeat cases. Investor.gov describes freeriding as buying and selling before paying, which can freeze the account for 90 days, so check your broker's cash account rules for how it applies each term.
Can I switch from a cash account to a margin account later?
Usually, yes. Most brokers let you apply to add margin to an existing account, which means signing a margin agreement and meeting the $2,000 minimum to trade on margin, plus any higher house requirement. Many brokers also let you remove margin, so starting in cash doesn't lock you in.
Can I lose more than I deposit in a cash account?
Generally no, because you pay the full price for everything you buy, so the most you can lose on a stock is what you paid. In a margin account you can lose more than you deposited, because losses on borrowed money still have to be repaid.
Does the pattern day trader rule still apply to my margin account?
The PDT rule was replaced by FINRA's intraday margin standards on June 4, 2026, but firms can phase in the change until October 20, 2027. If your broker hasn't switched yet, its old day-trading rules may still apply, so check your broker's notices. Lesson 10 explains what changed.

Up next: how should Sam lay out his screen?

Sam's account is open, his platform is chosen, and his laptop and one monitor are ready. But when he opens the platform, the windows pile on top of each other. Where should the chart go, where should orders go, and what belongs on a single screen? Lesson 18: Trading Screen Layout shows him.

Disclaimer

This lesson is for education only and isn't financial advice. Sam's choices and the margin examples are hypothetical. Trading on margin can lose more than you deposit, brokers may sell your securities without notice during a margin call, and short selling carries the risk of unlimited losses. Settlement, margin and day-trading rules change and brokers can apply stricter house rules, so confirm the details with your broker. Day trading carries a high risk of loss. Never trade with money you can't afford to lose. Read our full disclaimer.

Article Sources

DayTradingToolkit builds every lesson on primary sources from regulators. These are the ones used here.