Cash vs. margin accounts: settlement, leverage and violations

Start in plain English

Your account type decides two things before you place a day trade: whose money pays for the shares, and how quickly you can reuse it. A cash account trades only with money that is already yours and paid in full. A margin account lets the broker lend you money against the securities you hold, under rules set by the Federal Reserve, FINRA and the broker itself.

For a small-cap day trader, the difference shows up on the first busy morning. In a cash account, the limit is settled cash and the settlement clock. In a margin account, the limit is your equity and the broker's margin requirements, and a loss can exceed the money you deposited.

The core idea: a cash account limits you by settlement; a margin account limits you by equity and leverage. Neither is better in general. Each one breaks in a different way, and each has its own violations.

Settlement: when a trade is actually paid for

Every trade has two dates. The trade date is when your order executes. The settlement date is when the cash and the shares actually change hands. Since May 28, 2024, most US stock trades settle T+1, one business day after the trade date (SEC Rule 15c6-1).

Business days exclude weekends and market holidays. A sale on Friday settles on Monday. A sale on the last trading day before a holiday settles on the next business day after the holiday. In a cash account, that calendar decides when sale proceeds can pay for a new purchase.

Your platform shows a new position the moment you are filled. That does not mean the money behind it has settled. Most brokers show settled cash and unsettled proceeds as separate figures.

Regulation T, the Federal Reserve rule that governs credit from brokers, sets the cash-account rule. A broker may buy a security for you in a cash account if there are sufficient funds in the account, or if it accepts in good faith your agreement to pay in full before you sell (12 CFR 220.8). The short version: in a cash account, pay for a stock before you sell it.

A worked week in a cash account

All balances, prices and trades in this example are Illustrative. Brindle Optics and Quillfeather Bio are fictional. Assume an ordinary week with no market holidays, and ignore fees.

On Monday morning, a trader's cash account holds $4,000 of settled cash and no positions.

1. Monday 09:48 ET. She buys 1,000 shares of Brindle Optics at $4.00, using all $4,000 of settled cash. At 10:20 ET she sells the 1,000 shares at $4.12, for $4,120. This round trip is fine. The purchase was paid with settled cash, so she may sell it whenever she likes. The $4,120 of proceeds settles on Tuesday.
2. Monday 11:05 ET. She buys 1,000 shares of Quillfeather Bio at $4.10, for $4,100. Her settled cash is now zero, so this purchase is paid with Monday's unsettled sale proceeds. Buying is allowed. What matters is when she sells.
3. If she sells Quillfeather on Tuesday after the Brindle proceeds settle, or later, the purchase has been paid for in full before the sale. No violation.
4. If she sells Quillfeather at 14:30 ET on Monday, the shares were sold before the money that paid for them had settled. That breaks the cash-account rule.

The SEC's investor bulletin on cash accounts walks through this pattern (buy with unsettled proceeds, then sell before they settle) and calls it freeriding. Many brokers label the same pattern a good-faith violation. The label varies by broker; the rule underneath is the same Regulation T requirement to pay before you sell.

What the example shows: with $4,000 of settled cash, she could complete one round trip with that money on Monday, and use the proceeds again once they settled on Tuesday. A cash account does not count your day trades. It limits how often the same dollars can be reused, one settlement cycle at a time.

Good-faith and freeriding violations

Brokers use a few labels for cash-account problems, and they do not all draw the lines in the same place:

• Good-faith violation (a broker term, not a word in the regulation). You buy with unsettled proceeds and sell before those proceeds settle, as in the Monday 14:30 ET sale above.
• Freeriding. You buy and then sell without having paid for the purchase with your own money. The SEC bulletin uses this word for the unsettled-proceeds pattern too.

The consequence comes from Regulation T. If a security is sold without having been paid for in full, the broker must withdraw the privilege of delaying payment beyond the trade date for 90 calendar days (12 CFR 220.8(c)). During this freeze you can still buy, but only with cash that is in the account in full on the trade date.

Regulation T gives the customer one payment period to pay: the standard settlement cycle plus two business days, so three business days under T+1 (12 CFR 220.2). If full payment arrives in time from money that does not come from the sale, the freeze does not apply (12 CFR 220.8(c)(2)).

Brokers add policies on top. Many track good-faith violations over a rolling 12-month period and restrict the account after a set number. That count is house policy, not a number in Regulation T, so read your own broker's cash-account terms.

Margin basics: initial, maintenance and minimum equity

A margin account is a loan account. The broker lends against your eligible securities and charges interest on the amount you borrow. Four layers set how much you can borrow and how much equity you must keep:

Equity in a margin account is the market value of your positions minus what you owe the broker. When prices fall, the loan stays the same, so your equity shrinks faster than the position does.

Worked example: how far can the position fall?

Illustrative. A trader has $10,000 of equity and buys 4,000 shares of a fictional stock at $5.00: $20,000 of stock, $10,000 of it borrowed. Her broker's house maintenance requirement on this stock is 30%.

• Equity = market value − loan = MV − $10,000.
• Maintenance is breached when equity falls below 30% of market value: MV − $10,000 < 0.30 × MV.
• Solve: 0.70 × MV < $10,000, so MV < $14,285.71, a share price of about $3.57.

A 28.6% fall in the stock takes her equity from $10,000 to $4,285.71, a 57.1% loss of her own money. Below that line the broker issues a maintenance call, and its margin agreement generally lets it sell positions without waiting for her. With FINRA's 25% minimum instead of the 30% house rule, the line would be $13,333.33.

That is leverage in one sentence: the same price move becomes a larger percentage move in your equity, in both directions.

What leverage changes about risk

• Losses scale with the position, not with your deposit. A gap or a halt that reopens far below your stop hits the whole position, including the borrowed part.
• Your loss can exceed your equity. If a stock reopens below the level where the loan is covered, you owe the broker the difference.
• The broker can act first. To meet a call, a broker can generally sell your positions at prices you would not choose, and it does not have to wait for you.
• Borrowing has a cost. Debit balances accrue interest at the broker's margin rate. Read the rate schedule before you carry a position on margin.

Short selling needs a margin account

Under Regulation T, a cash-account sale is allowed only for a security that is held in the account, or one you own and agree to deliver promptly (12 CFR 220.8(a)(2)). A short sale is a sale of shares you do not own, so it takes place in a margin account, with its own margin requirement and a locate. How short selling works covers the mechanics.

Day trading in each account

• Cash account. No day-trade count applies. The limit is settled cash and the settlement clock, as in the worked week.
• Margin account. FINRA replaced its pattern day trader framework with an intraday margin standard effective June 4, 2026, and firms may phase it in until October 20, 2027. A given broker may still apply the old framework to your account. Buying power after the PDT rule explains both.

Common mistakes

• Reading "available to trade" as settled cash. Many platforms let you buy with unsettled proceeds. Check which figure you are looking at before you plan a same-day sale.
• Thinking a cash account bans day trading. It does not. It bans selling a security before you have paid for it.
• Counting weekends and holidays as business days. Settlement skips them, so proceeds can take longer to settle than "one day" suggests.
• Measuring a margin loss against the position instead of your equity. In the worked example, a 28.6% drop in the stock cost 57.1% of the trader's money.
• Assuming FINRA's 25% is your broker's requirement. For a volatile $3 small cap, the house requirement can be much higher, up to 100% (no leverage at all).

Apply it in FennEdge

• The Trading Journal syncs real fills from supported brokers. Use it to review net results trade by trade, and on Pro and Max, the Fees page breaks down commissions and other fees by component and period for supported broker accounts (fee coverage varies by broker).
• The Journal holds broker-synced trades only. It does not show settlement dates, margin balances or violations; your broker's statements are the record for those.
• When you review a losing day in a margin account, compare the loss with your account equity at the start of the day, not with the position size. That is the number leverage changes.

What this lesson does not claim

• It does not say which account type you should open. That depends on your capital, your broker's terms and how much risk you accept.
• Good-faith violation counts, house maintenance levels and margin interest rates are set by each broker. The 30% rate in the example is Illustrative.
• Regulatory figures are as of 2026-10-06. Settlement cycles and margin rules can change.
• This is education, not legal or tax advice.

Go deeper

• Next lesson: Buying power after the PDT rule, on how much a margin account can trade intraday.
• The rule change itself: The $25,000 pattern day trader rule is gone, with the timeline and what stayed the same.
• Sizing with leverage in mind: Position sizing in the scalping course.
• Related: Offshore brokers, for accounts held outside US broker-dealer rules.

Exercises

Three exercises follow this lesson: a concept check on what makes a cash-account sale a violation, a calculation of the market value at which a margin position breaches a house maintenance requirement, and a scenario that asks you to classify one trader's Monday in a cash account. Exercises, answers and progress are available after signing in.

Primary sources

• Federal Reserve Board. Regulation T, 12 CFR 220.8: Cash account (permissible transactions, payment, 90-day freeze).
• Federal Reserve Board. Regulation T, 12 CFR 220.2: Definitions ("payment period").
• Federal Reserve Board. Regulation T, 12 CFR 220.12: Margin requirements.
• US Securities and Exchange Commission. Rule 15c6-1: Settlement cycle; press release 2023-29 (T+1 compliance date May 28, 2024).
• SEC Office of Investor Education and Assistance. Trading in Cash Accounts, Investor Bulletin (updated August 7, 2026).
• FINRA. Rule 4210: Margin Requirements.
• FINRA. Understanding the New Intraday Margin Requirements ($2,000 minimum equity for leveraged trading; 25% maintenance).

Sources checked 2026-10-06. Brindle Optics, Quillfeather Bio and all balances, prices and rates in the examples are fictional and Illustrative. This lesson is education, not a recommendation to buy or sell any security.