In the cash account, all transactions must be made with available cash or long positions. When buying securities in a cash account, the investor must Deposit funds to settle the trade or sell an existing position in the same trading day, so the funds are available for settlement of “buy” order.
The margin account allows the investor to borrow against the value of the assets in the account to purchase new positions or sell short. Thus, the investor can use margin to leverage its position and profit from bullish and bearish movements in the market. Margin can also be used for cash withdrawals to the value of the account as of short-term loan.
For investors seeking to use their positions, margin account can be very useful and cost-effective. When you create a margin balance (debit) is, the balance owed is subject to a daily interest rate charged by the firm. These prices are based on current exchange rate plus an Additional amount that is charged for the lending firm and can work up to 10%.
An investor with a margin account may take a short position in XYZ stock, if he believes that the price will likely fall. If the price really falls, it can cover its short position at the moment long positions in stock XYZ. Thus, he makes a profit on the difference between the amount received at the initial short trade of sale and the amount he paid to buy stocks at a lower price, less stock, the interest for this period. (If you are going to trade on margin, you should understand the risks. For more information, see our Margin trading tutorial.)
In the cash account, a bearish investor in this case, you must find other strategies to hedge or generate income into your account, as it must use Bank deposits and only long positions. For example, he may enter a stop order to sell shares of XYZ stock if it drops below a certain price, which limits its risk.
Margin accounts must maintain a certain margin ratio at all times. If the value of the account falls below this limit, the customer is issued a margin call which is the demand to Deposit more money or securities to bring the account value within. The client can add new money to your account or sell some of their possessions to raise funds. Margin privileges are not offered on individual retirement accounts since they are subject to annual contribution limits, which affects the ability to meet margin requirements.
What happens to the securities from Your account?
Securities in your margin account may be lent to another party, or used as collateral, the brokerage firm at any time without prior notice or compensation, when there is an outstanding balance (or negative balance) on the account where you have accessed the borrowed funds. If the account is in credit state, where You do not use borrowed funds, the shares can’t be lent out.
Borrowers of stocks held in margin accounts are usually active traders such as hedge funds, who either are trying to short-term promotions or need to cover a stock loan that has been called. Investment firms who need a basic tool for a fixed-term contract may take your margin shares to the broker. The brokerage firm may also pledge the securities as collateral.
In addition, if your margined shares pay dividends, but not issued, You will not receive real dividends, because You are not the official owner. Instead, you will receive “payments in lieu of dividends,” which can have different tax implications. When your stock in debt, You can also lose their right to vote.
The share of loans in cash
If you authorize the brokerage firm, shares held in a cash account and can be put, which is a potential source of additional gain. This process is called share lending
There can be a lot of demand for short-sellers and hedge funds to borrow securities, particularly securities that are usually hard to take. Similar to the margin account when you borrow capital or securities, you are required to pay interest on the amount borrowed.
Depending on market prices and demand for the securities, the exact amount of accrued interest on loans of securities will change (more difficult to borrow, the higher the interest). The most attractive securities to Lend are those that are the hardest to take for a short sale, which usually means small caps or thinly traded stocks, and stocks that are already heavily shorted or dropped in price.
This requirement represents an attractive opportunity for investors with securities in demand. If you have a cash account with securities in demand, you can let your broker know that you are willing to lend their shares. If there is a demand for these shares, your broker will provide you With a quote on what he/she would be willing to pay you for the opportunity to lend those shares.
If you accept, your broker will lend your shares to a short seller or hedge Fund for a higher rate, and pocket the difference, and also satisfy another customer’s demand and generate commissions. For example, your broker may give you 8% interest on borrowed shares in lending of 13%. Depending on the size of your position, it may be a good additional source of income. This method also allows you to save an existing long position in the security and benefits of its upward movement.
Depending on the broker, he/she may or may not provide this service, and may also require a minimum number of shares or a dollar amount.