When it comes to brokerage accounts, there are two main account types:

1. Cash accounts
2. Margin accounts
   

The primary difference between a cash account and a margin account is access to leverage. A margin account allows investors to borrow funds and use eligible positions as collateral to establish and maintain trades, while a cash account limits trading to available settled funds. Certain products, such as futures, and strategies, including multi-leg options spreads, require a margin account.

This guide explains the key differences between a margin account vs. cash account, including the products and strategies available in each account, buying power, settlement rules, and other important considerations to help you choose the account type that best fits your trading needs.

Cash Accounts

A cash account is one of the most basic brokerage accounts one can open. There is no account minimum to open or maintain a cash account at tastytrade, nor are there any account maintenance or inactivity fees. Cash accounts only allow investors to establish positions with the cash they have available in their accounts. This prevents investors from borrowing money (access to leverage). The products and the scope of trading strategies are limited.

Cash accounts can be optimal for investors looking to purchase stock, establish long single-leg options positions, or purchase cryptocurrencies. Any short options position established in a cash account must be fully covered. You might have heard of cash-secured put or covered call strategies. These positions are often traded in cash accounts as they are fully covered positions by cash or stock holdings.

For example, selling a $100-strike put option to open in a cash account will require $10,000 of funds (100 shares x $100). When selling call options, a cash account must have at least 100 shares (round-lot) of stock per call option sold.

As a result of not having any access to leverage, investors at tastytrade will notice the available funds in their option buying power and stock buying power on the trading platform will be the same. This denotes that investors do not have access to leverage.

While having a cash account can offer investors peace of mind by preventing investors from establishing positions with borrowed money, investors may find the strategies allowed restrictive when ready to trade other strategies. That is why investors need to consider not only their risk tolerance and trading objectives but also what products or strategies to trade when considering the type of account to open.

At tastytrade, we do not have account minimums for US/domestic and international cash accounts. Allowed strategies in a cash account include:

• Buy Stock
• Buy Options
• Sell Covered Calls
• Sell Cash Secured Puts
• Cryptocurrencies (For Individual Cash accounts only)

Please visit the tastytrade Help Center to view a complete list of countries tastytrade currently supports. Cryptocurrency trading is unavailable for customers residing in certain states and countries. Please visit the tastytrade Help Center for current restrictions.

Trading in a Cash Account

When trading in a cash account investors and traders need to be aware of good faith violations. This occurs when you use unsettled funds to purchase another security and sell it before the funds have settled from the first or previous sale.

For example, your account holds $10,000 in ABC stock. You sold ABC stock to purchase DFG stock then sold DFG stock the same day before the funds from selling ABC stock have settled. This transaction will be marked as a good faith violation and when you get 5 good faith violations in a rolling 12-month period, your account will be set to closing-only. The settlement takes 1 business days after the trade date. However, the settlement period is subject to change.

Some investors and traders consider this as a downside of trading in a cash account as you would have to wait for your funds to settle unlike in a margin account.

Learn more about Good Faith Violations (GFV)

Margin Accounts

When comparing a margin account vs. cash account, a margin account provides access to leverage, greater buying power, and products such as futures, options on futures, uncovered options, and many multi-leg options strategies.

Additionally, margin accounts allow investors more capital efficiency than their cash account counterparts as you do not have to put up the entire cost of the trade but rather just satisfy the margin requirement for the security you are trading.

Trading Levels

tastytrade offers three trading levels for margin account holders, from the most flexible trading level to the most restrictive trading level:

1. The Works
2. Basic
3. Limited
   

Please visit the tastytrade Help Center to learn more about our trading levels, including an exhaustive list of permissible strategies and asset classes allowed in each trading level.

Margin Privileges

Margin privileges give investors the ability to borrow money and collateralize equity positions to establish other positions. While there is no minimum to open or maintain a margin account at tastytrade, account holders that want access to margin privileges must start the day and maintain an account equity of $2,000 or more and meet margin requirements for the positions they hold in their account.

When an account is eligible for margin privileges, the account's stock buying power will be twice the option buying power, indicating that the account can buy shares on margin. It's important to note that equity options, futures, and options on futures are non-marginable, which means investors cannot borrow cash to establish positions.

Why are Margin Accounts Necessary for Defined-Risk Options Trades?

A common question asked by new investors that want to trade any defined-risk options strategies is, "Why is a margin account required if my account has enough to satisfy the max loss of a defined risk credit spread?" The short answer is that options are leveraged products and there is always early assignment risk whenever involving a short equity options contract. This is why the only short option strategy allowed in a cash account is a cash-secured put.

Day Trading in a Margin Account

In a margin account, investors planning to day trade securities must know pattern day trading rules. Investors who place more than three day trades in a rolling five-business-day period will be flagged as a pattern day trader (PDT).

PDT-flagged accounts must maintain an account equity value of $25,000 or more. If an account's net liquidation value falls below $25,000 at the start of the day, you will receive an equity maintenance (EM) call. Please note that day trading can be extremely risky and is not suitable for all investors. You should be very familiar with the market if you are considering this strategy. As with any strategy you should have a full understanding of the risks involved.

PDT rules do not apply to futures, options on futures, and cryptocurrencies. Futures and cryptocurrency positions are transacted and held in separate accounts and are subject to cash sweeps to and from your securities account. Cash sweeps to futures and cryptocurrency accounts can potentially trigger an EM call for falling below $25,000 for your PDT-flagged securities account. Please visit the tastytrade Help Center to learn about the separation of accounts, pattern day trading rules, and for a short video on day trading and EM calls.

What is a Portfolio Margin Account?

A portfolio margin (PM) account applies a risk-based margin methodology called Theoretical Intermarket Margining System (TIMS) to determine buying power requirements for securities such as stocks, equity options, and cash-settled index options. This differs from the rules-based methodology that binds Regulation T (Reg-T) margin accounts. As a result, investors with a PM account will have access to up to ~6.7:1 leverage as opposed to the standard 2:1 leverage in a standard Reg-T margin account. It is important to note that the extended buying power relief afforded to PM account holders does not apply to futures or cryptocurrency positions.

Want to learn more about PM accounts? Please visit our portfolio margin page.

Margin Guide

Are you looking for a deep dive into the ins and outs of margin accounts, including how they differ from a cash account? Whether you're brand new to trading or just want to learn more about how margin accounts work, check out the tastytrade Margin Guide, where we break down the following topics:

• How margin works
• Brief introduction to Regulation T (Reg T)
• Margin account funding requirements
• Account equity related margin calls
• Day trading related margin calls
• Additional risks to consider

tastytrade Margin Guide

Choosing Between a Margin Account and a Cash Account

Choosing between a margin account vs. cash account depends on your trading goals, experience, and the products you plan to trade. A cash account may be appropriate for investors who prefer to trade with settled funds and avoid borrowing, while a margin account offers access to leverage, greater buying power, and advanced strategies such as multi-leg options spreads and futures. Understanding the differences in trading permissions, settlement rules, and margin requirements can help you select the account type that best aligns with your investment objectives and risk tolerance.