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Margin account vs cash account: Which is right for you?

Money.ca / Money.ca

Noel Moffatt

By Noel Moffatt

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Updated: November 04, 2024

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When choosing between a margin account and a cash account, it's important to know what sets them apart. 

A cash account is the simplest option — you can only trade with the funds you have, making it low-risk and straightforward. On the other hand, a margin account gives you the ability to borrow money, potentially boosting your returns, but it comes with added risks. 

This guide will help you decide which type of account aligns with your investment strategy and risk tolerance.

Key takeaways

● A cash account allows you to trade only with your deposited cash, making it a low-risk option ideal for beginners and conservative investors

● Margin accounts enable borrowing to increase buying power, appealing to experienced traders but carrying higher risks, including potential losses exceeding the initial investment

● Choosing the right account depends on your risk tolerance and investment goals: Cash accounts prioritize simplicity and safety, while margin accounts focus on leverage for higher returns

As stated above, a cash account (not the same as a non-registered account) is a type of brokerage account where you can only trade with the funds you’ve deposited — no borrowing, no leverage. It’s as straightforward as it sounds.

If you’ve ever managed a chequing or savings account, you’re already familiar with the mechanics: You put money in, and you can only buy what you can afford with what’s in there. No extra loans, no borrowing, just the cash you have on hand.

Key features

  • Trades settled with available cash only: You’re limited to the cash you’ve deposited, which keeps things simple
  • No risk of margin calls: Since borrowing isn’t allowed, there’s no chance of facing a margin call if your trades don’t go as planned
  • Ideal for beginners and conservative investors: The straightforward nature of a cash account makes it perfect for those who want a low-risk way to start trading

Pros and cons

Pros

Pros

  • Simple to use, no complex rules

  • No risk of margin calls or debt

  • Safe and suitable for beginners

Cons

Cons

  • Limited buying power

  • Must wait for settlement periods

  • Less flexibility for reinvesting

A margin account allows you to borrow funds from your brokerage, giving you the ability to purchase more securities than you could with just your own cash. This leverage can potentially amplify your returns, but it also increases the risks. 

Think of it like doubling your buying power — but with the possibility of losing more than your initial investment if things don’t go your way. This is the core concept of margin trading.

Key features

  • Increased buying power with borrowed funds: You can purchase more securities than your cash balance allows, boosting your potential gains
  • Potential for larger returns and larger losses: Leverage amplifies both sides of the equation—you can win bigger, but losses also grow
  • Margin calls: If the value of your investments drops, you might face a margin call, where your brokerage requires you to deposit more funds to cover the shortfall

Pros and cons

Pros

Pros

  • Potential for higher returns

  • Increased buying power

  • Access to advanced trading strategies

Cons

Cons

  • Risk of significant losses

  • Subject to margin calls

  • Debt accumulation if trades don’t go well

Key differences between cash and margin accounts

When comparing cash and margin accounts, the main distinctions revolve around ownership, risk and trading flexibility.

  1. 1.

    Ownership: In a cash account, you fully own the assets in your portfolio — no borrowed money is involved. Every stock, bond or security you purchase is entirely yours, which means you aren’t beholden to any loans or interest rates.

    In contrast, with a margin account, you’re trading with borrowed funds.     So, until those loans are repaid, your ownership is shared with your brokerage, as they have a stake in the assets you’ve purchased using their money.

  2. 2.

    Risk profile: Cash accounts offer a much lower risk compared to margin accounts. Since you’re only investing with your own money, there’s no danger of debt accumulation or margin calls, making cash accounts ideal for those who prioritize safety and stability.

    On the flip side, margin accounts are significantly riskier due to the leverage involved. While borrowing money can amplify your returns, it can also lead to much larger losses if the market turns against you. This heightened risk makes margin accounts more suitable for experienced traders who understand the complexities of leveraged investing.

  3. 3.

    Trading flexibility: One of the biggest advantages of a margin account is the flexibility it offers. The leverage provided by borrowing can help aggressive traders capitalize on short-term opportunities and make moves that would be impossible in a cash account.

    However, this flexibility comes at a cost — both in terms of risk and potential debt. Cash accounts, on the other hand, are far more straightforward. They’re best suited for conservative, long-term investors who value simplicity and prefer a stable, predictable approach to building wealth.

Related read: How to buy stocks in Canada

Account type Ownership Risk profile Trading flexibility
Cash account Full ownership of assets Low risk, no debt or margin calls Limited to available cash
Margin account Assets purchased with borrowed funds Higher risk, potential for debt and margin calls Leverage allows for more flexibility but higher risk

Choosing the right account: Cash vs. margin

Choosing between a cash account and a margin account comes down to your comfort level with risk and what you’re trying to achieve with your investments. The chart below breaks down the key differences to help you decide which one fits your approach.

Cash accounts Margin accounts
Prioritize security, avoid debt Suitable for experienced traders comfortable with risk
Best for long-term growth with minimal risk Designed to maximize returns through short-term movements
Ideal for beginners or those seeking simplicity Requires understanding of leverage and margin calls

No matter your experience level, understanding these differences will guide you toward the account that aligns best with your financial goals.

Scenario #1: Cash account

Meet Alex, our fresh-faced investor ready to dip his toes into the market but not too eager to dive into the risky stuff. Alex is all about building wealth at a slow and steady pace, focusing on the kind of solid growth you get from index funds and those tried-and-true blue-chip stocks. A cash account is his perfect match because it keeps things simple — he’s only buying stocks with the cash he’s got. 

No debt, no margin calls, none of that “borrow-to-grow” business. It’s a clean, no-nonsense approach focused on peace of mind and straightforward investing. If your style is all about keeping it safe and manageable, Alex’s cash account strategy may just be calling your name.

Scenario #2: Margin account

Now, here comes Jordan. He’s been around the trading block a few times and isn’t fazed by a bit of market whiplash. In fact, Jordan thrives on it. He’s looking to amplify returns and is more than ready to jump on opportunities to buy more shares when the setups look promising.

A margin account is Jordan’s tool of choice — it lets him borrow funds to boost his buying power, giving him that extra edge in the market. Of course, Jordan knows margin trading isn’t for the faint-hearted. There’s the risk of margin calls and interest to handle, but he’s prepared, disciplined and ready to ride those waves. If you’re looking to level up and can handle some calculated risk, Jordan’s margin account approach could be your next step.

Each of these account types offers something different depending on your comfort level with risk — so whether you’re Team Alex or Team Jordan, there’s a path that fits.

Related read: Best trading platform in Canada

Margin account vs cash account for day trading

Day trading with a margin account

Margin accounts can be the go-to choice for bold traders.

Why? Because they let you borrow funds from your brokerage to boost your buying power. That extra leverage can mean more potential returns since you’re trading with a bigger chunk of money than what you actually deposited. 

For day traders, who are often hunting for those rapid, small gains, that leverage is like jet fuel — big moves, fast results. But hey, more power doesn’t come free.

In the US, if you’re thinking of getting really active and making more than four day trades within five business days, you’ll be considered a “pattern day trader.” This means you’ll need to keep a minimum of $25,000 in your account to keep trading. It’s a rule aimed at making sure you can cover any potential losses, kind of like the “seat belt” for margin accounts. 

And trust me, margin accounts are for traders who know the game well — if things go south, the broker could issue a “margin call,” asking for more funds to cover losses. So, it’s a thrill but with a hefty price tag if things don’t go as planned.

Day trading with a cash account

On the other hand, cash accounts are like the trusty, reliable option in the world of day trading. With a cash account, you’re only using the money you actually have, no borrowing involved. This comes with its perks — it’s safer, simpler and way less nerve-wracking because there’s no debt to worry about if trades don’t go your way.

But there’s a catch: settlement periods. After you sell a stock, it usually takes one to two business days for the funds to “settle” and be ready for reinvestment. This can slow things down, especially if you’re eyeing multiple trades in a single day. Cash accounts may not have the adrenaline rush of margin accounts, but they’re ideal if you’re more focused on learning the ropes or prefer a lower-risk setup.

Here's the bottom line: If you’re after big moves and have the funds to back it up, a margin account may feel like a natural fit — but only if you’re ready to manage the risks. For a slower, steadier approach, cash accounts keep things simpler and keep you out of debt. To each to their own, right?

Questrade cash account vs margin account

Questrade is one of Canada’s top DIY trading platforms, catering to everyone from beginners to the most seasoned investors, and it’s popular for a reason. They offer a wide range of account options, and their low-fee setup makes them a favourite for folks looking to save while building up their portfolios with options like ETFs, stocks and mutual funds.

If you’re wondering whether a cash or margin account is the way to go on Questrade, you’re in the right place — let’s dig into what each has to offer so you can pick the one that aligns with your goals.

Cash account at Questrade

Think of a Questrade cash account as the no-nonsense, straightforward way to invest. 

  • Straightforward, no-frills approach to investing
  • Only use funds you've deposited — no borrowing involved
  • No interest charges or margin calls to worry about
  • Low-risk, low-cost environment, great for beginners
  • Ideal if you prefer predictable, steady growth
  • Works well for those valuing simplicity and stability

Margin account at Questrade

Now, a margin account is where things get interesting — and riskier. 

  • Enables borrowing to increase your buying power
  • Potentially higher returns through leverage (e.g., 2:1 leverage means $10,000 can be leveraged to invest $20,000)
  • Comes with borrowing costs (interest charges on the borrowed funds)
  • Risk of margin calls if investments decline, requiring additional funds
  • Best for those comfortable with higher risk, looking to maximize short-term returns
Start investing with Questrade

Which is best for you?

When choosing between a cash and margin account on Questrade, you want to get clear on a few things: Your goals, how much risk you're comfortable with and how often you plan to trade. Cash accounts are your go-to if you like to play it safe — no borrowed money, just what you put in, which keeps things steady and predictable. Perfect if you’re more about long-term, low-stress investing.

On the other hand, margin accounts are for those with a higher risk tolerance and a bit of market know-how. These accounts let you borrow funds to increase your buying power1, which means potential for quicker gains, but also bigger losses. Margin accounts can be great if you're looking to actively trade and don’t mind the extra adrenaline.

Example calculation

Assumptions for the example:

  • Initial investment: $10,000
  • Margin leverage: 2:1 (allows the investor to invest $20,000 by borrowing an additional $10,000)
  • Annual return: 8%
  • Margin interest rate: 6%
  • Investment period: 1 year
Metric Cash account Margin account
Initial investment ($) 10,000 10,000
Borrowed amount ($) 0 10,000
Total invested ($) 10,000 20,000
Total return (8%) ($) 800 1,600
Margin interest cost ($) 0 600
Net profit after 1 year ($) 800 1,000

In this example, with the cash account, you'd walk away with a simple $800 profit after a year. 

On the other hand, the margin account pulls in a higher $1,000 gain. But, and it’s a big “but,” there’s also a $600 interest cost for borrowing that cash. This right here shows how leverage can boost those returns — but at a cost.

The real takeaway? Weighing these numbers can help you figure out if a cash or margin account with Questrade is more in line with your goals and your risk comfort zone.

When to use a cash account vs when to use a margin account

When to use a cash account:

A cash account is your go-to if you’re after a simpler, low-stress way to invest – it’s all about building steady, reliable growth without diving into riskier territory. 

Here’s where it works best:

  • Ideal for long-term investors focused on steady growth
  • Suitable for those prioritizing safety and simplicity
  • Great choice for beginners and conservative investors
  • Avoids the risks of debt and margin calls
  • Best for buy-and-hold strategies

When to use a margin account:

A margin account, on the other hand, is like adding a turbocharger to your investment toolkit. It’s a fit for investors who aren’t fazed by risk and want to amplify potential returns through leverage and more advanced strategies. 

So, who’s it for?

  • Better for experienced traders with a higher risk tolerance
  • Useful for short-term or high-frequency trading strategies
  • Increases buying power through borrowing, allowing for potentially higher returns
  • Allows for advanced strategies like short selling and options trading
  • Requires comfort with managing debt, interest costs, and margin calls

When choosing between a cash account and a margin account, think about your own comfort with risk, your investment goals, and your experience level. Cash accounts are more beginner-friendly and straightforward, while margin accounts open up bigger possibilities for those ready to navigate the ups and downs of leverage.

Common mistakes investors make with margin accounts

  • Over-leveraging

    +

    Picture this, you’re so amped by the prospect of big gains that you borrow a little too heavily against your account. Sure, borrowing can dial up your profits, but here’s the kicker — it ramps up your losses too. One bad market turn and suddenly, you’re watching your account equity nosedive.

    And if you’re maxed out on borrowing?

    Well, that leaves basically zero wiggle room. Think of it like running full-speed on a treadmill that just went haywire. Not fun.

    Instead, play it safe! Use a conservative borrowing limit and keep a chunk of cash on the sidelines as a buffer against those market wobbles. Borrow smartly, and you can still boost your buying power without giving yourself a financial heart attack.

  • Ignoring margin calls

    +

    Margin calls are the buzzkill of any margin account.

    When your equity dips too low, you’ll get a call from your broker saying, “Time to add funds or start selling.” Ignore it, and they’ll handle the selling for you, often at lousy prices — talk about adding salt to the wound.

    Staying on top of your account balance can prevent these surprise sales from blindsiding you. Keep an eye on the numbers, especially when the market’s having a rough patch. Set up alerts for low-equity levels, so you get the heads-up before things get ugly. A quick response can mean the difference between keeping your account steady or watching it get wiped out in forced sales.

Which account Is right for you?

Here’s the bottom line: Cash accounts and margin accounts are like two different flavours of investing, each with its own pros and cons, depending on what you’re after.

If you’re more about steady, long-term growth and a straightforward approach, cash accounts are the way to go. No borrowing, no debt, and no margin calls — just simple, low-stress investing. Perfect for anyone who’s new to the game or just wants to avoid the roller-coaster risks.

On the flip side, margin accounts are built for those with a bit more experience (and a bit more risk tolerance). The leverage you get here can be a powerful tool for boosting returns, but it’s not without its downsides, like interest costs and the risk of margin calls. This account is for investors who don’t mind the occasional adrenaline rush and want the flexibility to seize more opportunities—even if it means handling some extra complexity.

In the end, whether you’re Team Cash or Team Margin comes down to your comfort level with risk, your trading goals, and how hands-on you want to be. 

FAQs

  • Can you day trade with a cash account?

    +

    Yes, you can day trade with a cash account; however, you must wait for your trades to settle, which can limit the number of trades you can execute in a single day. This slower pace can impact active trading strategies, so consider it if you’re planning on frequent trades.

  • Is it better to have a margin or cash account?

    +

    The best choice depends on your comfort with risk and trading style. Cash accounts are safer, as they limit your spending to available funds, making them ideal for conservative or beginner investors. Margin accounts, however, offer the ability to borrow funds, which increases buying power but also adds financial risk. Choose based on your investment goals and risk tolerance.

  • What are the disadvantages of margin accounts?

    +

    Margin accounts carry several risks, including the potential for significant losses and margin calls if the market turns against you. You’re also responsible for paying interest on borrowed funds, which can accumulate quickly. It’s essential to understand these risks before using a margin account.

  • What is the difference between margin and cash accounts in Canada?

    +

    In Canada, a margin account allows you to borrow against your securities, enabling you to make more investments with increased potential returns and risks. A cash account, by contrast, is simpler and safer, requiring you to use only your funds without any borrowing involved.

  • Should a beginner use a margin account?

    +

    It’s generally recommended for beginners to start with a cash account to avoid the complexities and risks associated with borrowing. Cash accounts allow you to gain experience with a safer, more straightforward approach before exploring the added risks and rewards of margin accounts.

  • Can you lose more than your initial investment with a margin account?

    +

    Yes, with a margin account, losses can exceed your initial investment due to borrowed funds. If the market moves unfavourably, you may be required to cover additional losses, which is why margin accounts are better suited for experienced traders with a high tolerance for risk.

Noel Moffatt Writer

Noel Moffatt is a Canadian fintech expert with a passion for simplifying personal finance. Based in St. John’s, NL, he draws on his background in finance, SEO, and writing to deliver clear explanations and actionable advice. Noel is dedicated to equipping readers with the knowledge and tools they need to make informed financial decisions, striving to make personal finance more accessible and understandable through his in-depth articles and reviews.

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