The key difference between a cash account and a margin account is that a cash account uses your funds to finance stock purchases, while a margin account can use borrowed money from a broker to invest besides your funds.
Most brokers offer these two types of investment accounts in Singapore. You must choose either one for trades and may switch to another later. Margin trading stocks can magnify returns and losses.
So, which one is better? It depends on your investment goals, strategies, and many more. You can read on if you want to know.
Margin Account vs. Cash Account
In the table below, we compare the differences between a margin account and cash account.
| Margin Account | Cash Account | |
|---|---|---|
|
Leverage |
Yes |
N/A |
|
Requirements |
|
No requirements |
|
Minimum equity |
SGD 2,000 TO 3000 |
0 |
|
Stock transfers |
Not allowed |
Yes without other conditions |
|
Returns |
Higher |
Lower |
|
Risks |
Higher |
Lower |
1. Leverage
Margin Account
Leverage involves financing for a stock purchase. You borrow money(usually 50-70% of a share’s price) from a broker to buy a stock with your funds(30-50%). That’s, you use funds less than a stock price to invest in a company share. After selling the stock, you repay the principal with loan interest to the broker.
Cash Account
You use only your money to invest in the market by owning a cash account. A cash account does not involve leverage, loan amounts, interests, and possible balances below zero in your account.
2. Requirements
Margin Account
Once you set up a margin account with a broker, you must follow several industry-wide rules to keep your account operational.
- Initial Margin: An initial margin is the required financing allowed to purchase a stock. The loan percentage for assets varies depending on investment tools. Usually, a margin is 50-70% for loans for stocks and lower for bonds.
- Maintenance Margin: Once you use margin to buy stocks, a broker requires you to check and maintain the required equity on your stocks regularly. The equity level is the position you hold in a stock portfolio.
- For example, you have a stock portfolio with a 25% maintenance margin position. If the portfolio’s value falls, your equity position falls, and a broker may demand you deposit additional money to keep up to a required 25% margin level.
- Margin Call: The demand from a broker for keeping up a required equity level is called a margin call. A broker may force a sale of your portfolio stocks for the failure to maintain a maintenance level.
Cash Account
Cash account investors use their funds to buy stocks without any restrictions and requirements for margin investors.
3. Minimum Equity
Margin Account
Besides the maintenance margin, an investor should maintain minimum equity for his account. The minimum equity is a minimum investment balance(SGD2000-3000) required of a margin investor.
Cash Account
No minimum balance is available in a cash account.
4. Stock Transfers
Margin Account
A broker rarely allows stocks bought on margin transfer out of its account since they are collaterals for margin trading, and an account has a debit balance.
Cash Account
Clients can transfer stocks in and out of their will if they do not participate in any programs offered by brokers and have their accounts under any restrictions.
5. Returns
Margin Account
The returns are higher when you borrow to invest with your funds and make a profit. You can learn more by reading further.
Cash Account
Unlike a margin account, a cash account holder invests only with his money and makes fewer profits than an investor trading on margin if a stock rises in value.
6. Risks
Margin Account
An investing principle holds: “the higher the risks, the higher the rewards.” If your portfolio falls in value, you lose what you have and have-nots. Like profits, the risk of losing magnifies. Knowing the risk is as important as knowing the profit potential from margin trading.
Cash Account
The most significant risk for a cash investor is the loss of all his money only since the financing source is his funds.
The table below summarizes the primary differences between a margin account and a cash account.
How does a Cash Account Work?
A cash account is Singapore’s most common brokerage account. You should deposit cash into a cash account to purchase securities. All transactions are settled in cash only. Unlike a margin account, you can only buy a stock in your funds for its full purchase price.
You cannot borrow money to buy stocks from a cash account and will not incur loan interests. Therefore the maximum loss is the funds available only in your cash account.
Stocks, bonds, and funds are popular investments traded in cash accounts. Some brokers may allow limited derivatives to trade in cash accounts like options and warrants.
1. Benefits
Cash account investing offers an easy-to-understand technique, especially for beginner investors. You earn and lose with all you have. Risk-averse investors may prefer cash accounts as the loss will not extend beyond the funds in the accounts.
Most cash accounts have no minimum investment requirements; you only put money into an account when ready to invest.
2. Risks
You may miss an investment opportunity if you do not have enough funds in your account.
While your funds are the only source for financing your investments, unlike margin trading, you cannot buy more than you have when the chance comes.
You may wait longer to have another investment. If you intend to switch from stock A to stock B due to the latter’s prospects, you may wait 2 business days for stock A’s settlement before using the sale proceeds to buy stock B.
Besides, you cannot access investment tools like futures, advanced option investing, or short selling because only a margin account provides the services.
3. How and Where to Get a Cash Account?
All brokerages and banks offer cash account services in Singapore. You can open an account with banks and traditional brokers in person or access their official websites by filling out forms online. Today, online and traditional brokers and banks provide competitive services alike.
How does a Margin Account Work?
Besides the features of a cash account, one of the benefits of a margin account is an investor can increase his buying power through trading on margin. Like a bank credit line granted by your broker in the margin account, you magnify your investing power more than with your funds only.
If you have SGD10,000 in a cash account, your purchasing power is the cash available for buying stocks. But if your broker gives you a credit limit of SGD50,000 in your margin account, you can now have five times more buying power than the limit a cash account provides. Most brokers allow the use of a credit line for trading stocks only, and the stocks bought become collateral for a margin loan.
Usually, an investor uses up his funds and reaches the limit of required cash equity before beginning to draw down the loan for investing. A buying power in amounts from a message board reminds the investor how much funds he can use to buy stocks.
When an investor begins trading on margin, a “debit balance” unique to the margin account appears, showing your loan amount in the account balance.
An occasion arises when your portfolio’s value falls below the required equity amount of 25%, for example. Margin calls show up to restore it to its mandatory level.
An investor has two typical options:
1. Sell the stocks for a loss
2. Put additional funds to reinstate it to the previous status.
A broker may sell stocks in the portfolio to recoup the discrepancy if an investor does not take action within a period, usually a day.
1. Benefits
An investor magnifies his profits, through margin loans, because of their propelling firing power. The returns, multifold from profits earned by a cash investor, grow faster. Besides, he has more choices over investment tools offered by a margin account.
Investment tools, such as futures, covered calls and puts, and short selling activities, require margin loans provided only by margin accounts to work.
Portfolio diversification magnified by margin trading may bring more benefits than cash accounts. Compared with the diversification benefits a cash account brings, a margin investing strategy can make a portfolio more well balanced and reduce its price risks because of the investment funds.
A margin account provides the facility for the asset switch process. If you intend to sell stock A and buy stock B because of a market opportunity but have inadequate funds in your account. Selling stock A and awaiting the settlement time of 1 or 2 days to unfreeze your funds from the sale, you may miss the current market moments for stock B. A margin account provides an urgent funding source to buy stock B, so you do not miss the opportunity.
2. Risks
Like profit enhancement, the loss from margin trading amplifies if your portfolio goes south. Margin trading is a complicated and high-risk investing tactic, and your portfolio may encounter uncontrollable factors like market turbulence and unexpected political events and intensify your loss. You may have to repay the margin loan with interest if the loss extends far beyond your funds to borrowed money.
You may be overwhelmed by various investment options and lose your way towards your goals. Novel investors may risk losing their bets if they have little experience in structured trades.
You may have little control over your assets. If you have a margin call due to falling prices and do not pay back the deficiency on time, your broker may resell your stocks at prices you cannot control. You may lose your capital or the chance of future price uptakes.
3. How and Where to Get a Margin Account?
Most banks and brokerages in Singapore offer margin account services to clients. You may provide more formalities and documents than you for a cash account. Like a bank’s spare loan line, once you get approval from your broker, you can use the loan to buy stocks or invest with your funds.
Best Brokerages in Singapore
|
Brokers |
Minimum commission in SGD for Singapore stocks |
Minimum commission in USD for the US stocks |
Minimum investment amounts |
|
0 |
0 |
0 |
|
|
DBS Vickers Securities |
25 |
25 |
0 |
|
0.06% of the trade volume |
1.99 |
0 |
|
|
OCBC Securities |
25 |
20 |
0 |
|
2.5 |
1 |
0 |
|
|
Moomoo Brokers |
0.99 |
0 |
0 |
|
WeBull Singapore |
0 |
0 |
0 |
Should You Open a Cash or Margin Account?
A margin account works for you if you are an active investor who aims to beat the market and is comfortable using sophisticated investment tactics to help you achieve your goals.
A margin account suits you if you are a risk-taking investor familiar with the risks of using leverage to win in your trades. A margin account meets your needs by offering investing flexibility when you may not have enough reserve.
A cash brokerage account fits your needs if you need a simple and stable investing environment and are at ease with gradual progress in achieving your investment goals.
A cash account may put you on a stepping stone toward a professional.
Tips on Using the Accounts Wisely
1. Do your homework and get prepared
Investing is a business of risks. Every asset you purchase comprises price fluctuations due to market, geopolitical events, and enterprise failure risks. Knowing an investment helps you better understand the risks and increase your chance of winning.
2. Know the rules
If you decide to trade on margin, you should know both sides of a coin. Multified returns are why you trade on margin, but you should prepare for the worst if you fail. In a cash account, all you lose is your capital if all the investments are in deep red. However, investing on margin is more complex. You may lose the loan with interest accumulating interests plus your funds.
3. Build up feasible investment strategies
You may need to build up flexible investment strategies for coping with various scenarios. An adequate cash reserve should be a part of investment strategies for unexpected market changes.
Bottom Line
A cash account is an account holding your funds for financing investments, while a margin account provides a loan facility for investing apart from your funds. You need prudent planning in investing, especially using margin for trading. However, the rewards for margin investing magnify relative to cash investment, so the losses from margin trading can amplify.
Key takeaways
- A cash account uses your funds to finance stock purchases.
- A margin account can use borrowed money from a broker to invest besides your funds.
- The returns from trading on margin are multifold higher than from cash investing only.
- The losses from margin trading are multifold higher than from cash investing.
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