(Newswire.net — November 30, 2020) — There are many investors out there who are looking to invest their money in the best possible way that will let them reap the benefits of that investment, and that is called a “return on investment” (ROI) in the financial world.
Investors looking to purchase securities where they can safely invest their money often do so by opening a brokerage account. There are two main types of brokerage accounts – cash accounts and margin accounts.
What is a brokerage account?
A brokerage account is an arrangement where an investor deposits money with a licensed brokerage firm and in return they would place trades on behalf of the customer in the market.
What is a cash account?
A cash account is a brokerage account where the investor has the full amount of securities they need to purchase. For example, if you have deposited $5,000 in your account, you can purchase up to $5,000 in securities, meaning that all transactions must be made in cash.
In addition, if you give permission to the brokerage firm, shares held in a cash account can be lent out to other interested parties including short sellers and hedge-funds as this can have an additional gain for an investor. This process is called securities lending.
What is a margin account?
A margin account works the same as a credit card; it extends the ability of an investor to borrow against the value of the assets in the account in order for them to gain new positions or sell short.
In simple terms, the investor would deposit cash and the brokerage firm would loan the investor money. margin accounts come with more options as well as more risks such as charging a high interest rate, yet they can be especially useful when investors want to leverage their positions in the market.
What is a position in stock markets?
A position is the amount of security, commodity, or currency that is owned by an individual or any fiscal entity. They come in two types – short positions, and long positions.
Short positions are normally borrowed and then sold, while long positions are owned and then sold.
What is a margin call?
It is when your brokerage firm requires you to increase the value of your account, either by depositing cash or liquidating some of your assets. Margin calls occur when you no longer have enough money in your account.
The risks of a margin account
There are both benefits and risks to opening a margin account as previously mentioned. However, they come with more risks even though they give the investor an extended authority in the form of margin loans.
Although they can amplify your gains, they can also magnify your losses. You would have to liquidate your stocks during a margin call because the market losses will have reduced the value of your investments.
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ADCB’s brokerage accounts
ADCB’s brokerage accounts offer a multitude of benefits and services such as updating the investor with the latest market news, as well as providing integrated solutions that strengthen an investor’s portfolio.
You can invest securely with ADCB’s margin accounts and get many benefits such as 7% interest on utilised margin and a free daily report. While for cash accounts, ADCB charges no fees on your portfolio, e-statement, or daily research report.
Margin account vs cash account: Which one should you choose?
For novice investors, it is better to steer away from margin accounts because cash accounts meet most of the needs of basic investors with less risk involved.
However, margin accounts offer more flexibility in gaining profits as you can sell stocks short, also known as short selling, which allows an investor to profit even when there is a decline in stocks prices.
So, it depends on your budget, how much you are looking to invest, and how many assets you have, in order for you to know the amount of risks you’re willing to take. (7)
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