The thinker statue in a pile of cash

Understanding Cash, Margin and IRA Accounts

By:Anton Kulikov

Accounting for the differences among different types of brokerage accounts

  • Cash accounts are fully financed by cash in the account.
  • Margin accounts allow borrowing money from the broker to leverage your capital.
  • IRAs offer more flexibility than cash accounts but still have restrictions.
  • The pattern day-trading rules restrict margin accounts with less than $25,000 from making more than three day trades in a rolling five-day period, but there are ongoing efforts to modify or eliminate this rule.

In the world of complex financial structures and features, traders should grasp the fundamental differences between the types of brokerage accounts, so that they can choose the one that fits their needs. They should also know about some of the commonly overlooked "extras."

What are the different kinds of brokerage accounts?

If you scroll through the tastytrade website, you will find a lot of different "types" of brokerage accounts, but fundamentally there are two distinct kinds: cash and margin.

The key differences are:

  • The amount of capital is required to place a trade.
  • The kinds of transactions the account owner can make within the account.

We will quickly see how trades are financed and how much buying power is required with a short option leg in the position.

Features of a margin account

  • You can trade stocks, options, futures and crypto with efficient buying power and margin requirements.
  • Pattern day-trading rules apply for accounts worth less than $25,000.
  • Portfolio margin can offer even more capital efficiency, 3 times more than regular margin, for accounts worth more than $175,000.

Key features of a cash account:

  • All trades must be fully financed by cash.
  • No pattern day trading (PDT), but you cannot cumulatively trade through more than starting day cash.
  • No futures, naked short calls, reduced buying power for spreads or short stock.

What about IRAs?

  • Think cash account, “plus" some margin features.
  • You can sell calls, spreads and futures, but no short stock.
  • Capital requirements for positions are nearly the same as those in a cash account.

When picking an account, the key question to keep in mind is whether you want financing capabilities from your broker to be able to trade anything with efficient capital use, or do you want to self-fund your portfolio fully with no brokerage financing options? That way, it becomes easy, and you can focus on trading what you want! Watch me explain it further with the CEO of tastytrade himself, here.

Anton Kulikov has a decade of trading experience. He leads research content creation at tastylive and appears on more than 20 live shows, including Futures Power Hour, Options Jive and Research Specials LIVE. He co-authored the bestselling investment strategy book Unlucky Investor’s Guide to Options Trading and contributes research content to Luckbox magazine 

For live daily programming, market news and commentary, visit tastylive or the YouTube channels tastylive (for options traders), and tastyliveTrending for stocks, futures, forex & macro.

Trade with a better broker, open a tastytrade account today. tastylive, Inc. and tastytrade, Inc. are separate but affiliated companies.

Image generated with Midjourney.

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

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