Account Types and Margin Rules

The type of brokerage account you open determines what you can trade, whether you can borrow, how quickly you can reuse money and which rules apply. A cash account is simple and limits losses to what you deposit. A margin account lets you borrow and sell short, with more flexibility and more risk. Specialised accounts such as portfolio margin and retirement accounts follow their own rules. This lesson focuses on US rules for securities; futures and other countries differ.

Main account types#

Cash account rules#

• Settlement: US stock trades settle T+1, one business day after the trade, since 28 May 2024.
• Good faith violation: buying with unsettled sale proceeds and selling before those proceeds settle.
• Free riding: buying securities and paying for them only with the proceeds of selling those same securities. Violations can lead to a 90 day restriction to trading only with settled cash.

Margin account rules#

Regulation T is set by the Federal Reserve. Brokers can and often do set stricter requirements, especially for volatile stocks.

Portfolio margin#

Portfolio margin sets requirements based on the modelled loss of the whole portfolio under price moves, often allowing much lower margin for hedged positions and higher leverage overall. It typically requires a large minimum equity, often $100,000 or more depending on the broker, and options approval. Higher leverage means larger potential losses. See Leverage.

Margin interest#

Borrowing on margin costs interest, usually at rates that fall as the balance rises. Over long holding periods, margin interest can significantly reduce returns. See Margin Financing and Financing and Overnight Costs.

Options approval levels#

Brokers assign options trading levels based on experience and finances, from covered calls at the lowest level to uncovered (naked) options at the highest. Margin accounts are needed for most spread and short option strategies. See Options Trading.

Outside the US#

Frequently asked questions#

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

A cash account uses only your own settled money; a margin account lets you borrow against your holdings and sell short, under margin rules.

What is Regulation T?#

A Federal Reserve rule that sets initial margin for securities purchases, typically 50% for stocks, and governs credit extended by brokers.

What is a good faith violation?#

Buying a security with unsettled funds in a cash account and selling it before those funds settle.

Next, learn about limits on position size and reporting rules in Position Limits and Regulatory Reporting.