Cash and Margin Accounts
A margin account borrows against the securities in it. That changes settlement, enables short selling, and introduces a lender with the right to close positions.
MadStockAlerts Research · Updated August 29, 2026
What to take away
- A cash account settles every purchase with cash already there; a margin account can borrow.
- Margin enables short selling and removes most settlement restrictions.
- The margin agreement lets the broker lend out your shares and close positions without asking.
- Cash accounts have their own trap: the good-faith violation, which has nothing to do with borrowing.
- Margin interest accrues daily and is charged whether or not the position works.
MAD Academy Training Video · 0:45
Two Different Legal Relationships
A margin account is not just a cash account with borrowing. The shares are held differently, and that changes what you own.
This lesson is part of a Stock Alerts + Tools plan.
What each one is
A cash account pays for every purchase with settled cash. A margin account is a lending arrangement: the broker extends credit against the securities held, which become collateral for the loan.
| Cash account | Margin account | |
|---|---|---|
| Buying power | Settled cash only | Cash plus borrowing capacity |
| Short selling | Not possible | Possible, subject to borrow availability |
| Settlement constraints | Binding, and easy to breach accidentally | Largely removed |
| Interest | None | Accrues daily on the borrowed balance |
| Your shares | Held for you | May be lent out under the margin agreement |
The last row surprises people and is standard. A margin agreement typically includes a hypothecation clause allowing the broker to lend securities held in the account, which is where the supply of borrowable shares for short selling comes from.
The cash account trap
Cash accounts have a restriction that has nothing to do with borrowing and catches active traders regularly. US equity trades settle one business day after the trade, and cash from a sale is not settled until then.
- 1Buy with settled cashFine. The cash was there.
- 2Sell the same day or the nextAlso fine, and the proceeds are unsettled until the following business day.
- 3Buy again with those unsettled proceedsPermitted, provided the new position is held until the cash settles.
- 4Sell that position before settlementThis is a good-faith violation, because the purchase was paid for with money that had not arrived.
Repeated violations lead to the account being restricted to settled cash only for a period, typically ninety days. Nothing was borrowed and no rule about leverage was involved; the restriction is about paying for a purchase with money that has not yet arrived.
- 1Buy with settled cashFine
- 2Sell the same dayAlso fine. Proceeds are unsettled until the next business day
- 3Buy again with those proceedsPermitted, provided the new position is held until settlement
- 4Sell before settlementThe violation. Three of these restricts the account
What the margin agreement permits
The agreement is a contract, and the clauses that matter most are the ones granting the broker rights rather than the ones describing the loan.
- The broker may sell securities in the account to meet a shortfall, without contacting you first.
- It chooses which securities to sell, and is not obliged to pick the ones you would.
- It may lend securities held in the account to short sellers.
- It may raise its own margin requirements at any time, including on a specific security.
- It may change the interest rate on the borrowed balance.
None of these are unusual terms and all of them are exercised. The fourth is the one that most often causes trouble: a broker raising the requirement on a volatile security can create a shortfall in an account that has not traded at all.
The cost of the borrowing
Margin interest accrues daily on the borrowed balance and is charged monthly. The rate is set by the broker, usually as a base rate plus a spread that narrows as the balance grows, and it moves with the policy rate.
The consequence for a leveraged position is that time is a cost. A position financed on margin must produce a return above the interest rate simply to break even, and the requirement compounds the longer it is held. That is a different structure from an unleveraged position, where holding costs nothing.
This is why margin borrowing is usually described as suited to short holding periods, and why a leveraged position that stops working becomes more expensive to be wrong about with every day it is held.
What the account type does not change
Several things are frequently attributed to the choice between cash and margin and are unaffected by it, which is worth separating out.
| Affected by the account type? | |
|---|---|
| Which securities can be bought | No, with the exception of short sales |
| The commission or the spread paid | No |
| How orders are routed | No |
| The tax treatment of a gain | No. The holding period and the account's tax status decide |
| Protection scheme coverage | The coverage applies, though pledged securities sit differently |
| Settlement timing | No. Settlement is a market convention, not an account feature |
The last row is the one most often confused. A margin account does not settle faster; it lets a purchase be made before settlement because the broker is willing to extend credit in the interim. The trade still settles on the same schedule.
A margin account can also be operated without ever borrowing. The agreement permits borrowing; it does not require it, and an account that never carries a debit balance pays no interest while retaining the settlement flexibility.