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Margin Account vs Cash Account: Which is right for you? - YouTube
Channel: StocksToTrade
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- In today's video,
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we're gonna talk about cash
accounts, margin accounts,
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the pros and cons as well as
which you should be using.
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(upbeat music)
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- Hey, everyone.
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Lead Trainer with
StocksToTrade Tim Bohen here.
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Be sure to subscribe and get access
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to these videos as soon
as they're released.
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And also, leave a comment below.
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Do you use a cash account or a margin?
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Just real quick, comment cash or margin.
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Would like to know what
most of you are using.
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What we're gonna talk about today
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is kind of a brief overview
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of cash, margin, the pros and cons
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and kind of which one
maybe you should be using,
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'cause you can switch back and forth,
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which one maybe you
should switch to as well.
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Let's start out with a cash account
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because it's a pretty simple idea.
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I think most of you will
grasp it pretty quickly.
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When you have a cash account,
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you're able to trade the amount
of money in your account.
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So if you have a thousand
dollars in your account,
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you can buy a thousand
chairs of a $1 stock.
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That's the most you can buy of that stock.
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That's called your buying power.
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So if you deposit a thousand dollars
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in your brokerage account,
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your buying power is $1,000.
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You can't buy more than that
total of a particular stock.
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That's great because it helps kind of
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keep you out of trouble that you can get
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into with margin trading,
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which I'm gonna also talk about.
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Now couple of the rules are,
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the nice thing with a cash account
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is you are not susceptible to
the pattern day trader rule.
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So many, many, many traders
kind of misunderstand this.
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Don't feel bad.
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There's many misunderstandings
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that revolve around the
pattern day trader rule.
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It's very confusing and convoluted.
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But if you have a cash account,
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you are not limited by those three trades
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in a rolling five day period
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like you are with a margin account.
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Now, one thing you do need
to take into consideration,
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it doesn't mean you can
freely trade, day trading,
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because of the fact that most brokers
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will have different settlement
periods, it's called.
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So when you're trading that cash,
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they may not settle your cash
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for a day, two days or three days.
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So you have to be a little bit careful.
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You can't freely day trade
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but the nice thing is you're not limited
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by those rules of the
pattern day trader rule.
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Now let's talk about margin trading
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and why you would wanna use it.
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Most day traders, good or bad,
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use margin because of the fact
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that it allows several things.
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Number one, it allows you
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to buy more stock than you
have cash in your account.
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The other thing it allows
you to do is short sell.
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So with a cash account,
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you're not limited by the
pattern day trader rule
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but, keep this caveat down,
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you cannot short a stock
with a cash account.
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And if you're curious about shorting,
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we've got tons of videos.
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Scroll through our feed, you'll see 'em.
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We talk about shorting a lot.
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I won't spend too much time on it here.
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But with a margin account,
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you can short stocks and
then you can also buy more
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than the cash in your account.
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Basically, they're giving you leverage.
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You'll hear that term a lot as well.
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And what they're doing is,
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in essence, loaning you
money on a short period.
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So many brokers will have
2:1 leverage, 3:1, 4:1.
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Some brokers have even higher,
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which kind of gets out
in the sketchy area.
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If you're using a broker
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that's giving you more than 4:1 leverage,
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you might wanna be
cautious using that broker.
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Pretty much any brokerage account
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will give you two to 4:1
leverage on your account.
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So what's that mean?
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Remember back to my original scenario,
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you can buy a thousand chairs
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of a $1 stock if you've got
a thousand in your account.
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If you've got 4:1 leverage,
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you can now buy 4,000
chairs of that $1 stock
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even though you still have
that $1,000 in your account.
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Now, I know what probably
almost all of you are saying.
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You probably perked up at that point
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and you're like, whoa,
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I can trade way bigger
positions with a margin account.
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Let me in.
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Give me a margin account.
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But remember, margin is
a double-sided blade.
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It cuts both ways.
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So the great thing about trading on margin
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is if you're right, if you nail the trade,
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you've now got 4,000 chairs versus 1,000.
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So in an ideal scenario,
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that stock spikes a dollar.
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You now made $4,000 instead of $1,000
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with the same amount in your account.
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Sounds awesome.
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I'm sure all of you would love that.
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I would love that.
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But remember that blade cuts both ways.
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If you lose a dollar on that trade,
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you now lose $4,000,
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which would exceed your account.
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Your broker would never let that happen
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but I think you see what
I'm getting at here.
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Margin magnifies your winners
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but it magnifies your losers as well.
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Highly recommend a margin
account as a day trader,
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especially if you're looking to short
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and you're looking to
trade these momentum stocks
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but you have to cut your loses quickly.
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You have to have a trade plan.
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That 4:1 leverage,
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that 6:1 leverage,
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that 10:1 leverage can
wipe you out very quickly
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if you do not stick to that plan
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and do not keep your loses small.
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Thanks for watching our video.
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Be sure to comment below with
any trading related question.
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We love answering your questions.
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Also, like and share with your friends
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And if you're looking to
expand your trading knowledge,
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don't forget to check out
all of our other videos
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