There are two types of Webull accounts – margin and cash accounts. Webull users who are new to the world of stocks, ETFs, cryptocurrency, and bonds generally don’t have a clue what account to choose. In this article, we’ll get into more detail about what is a cash account on Webull and how it compares to a margin account.
A cash account on Webull is a standard account that permits users to trade by using only settled funds. All users are required to abide by no-day-trading and cash settlement rules. Essentially, one can only make trades with money that is already in the cash account.
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What Is a Cash Account on Webull?
Cash accounts are designed for users who want to trade with settled funds without any leverage. The main rules of the Webull cash accounts are the cash settlement rule and the no-day-trading rule that all users must respect. If one wants to trade, it’s essential to first have some funds deposited into a Webull account. Even accounts that have $2,000 or more in value are not allowed to access leverage.
When it comes to options, there are four strategies one may select. The first strategy is covered calls, and the others are long calls, cash-secured puts, and long puts. A situation when Webull’s user sells a position that was purchased using unsettled funds is considered a Good Faith Violation. One can do this, but it’s thought of as a violation.
What Are the Pros and Cons of Cash Accounts?
|Less Risk – One can be certain that losing money is not an option since it’s possible to invest only the funds you have in the account. In case one deposits $500, it’s only possible to lose up to $500
|No leverage – Some benefits of leverage will be lost
|Accessibility – Cash accounts allow users to instantly access their money
|Profit limits – The lucrative investments will be out of reach since you can’t gain more than you’ve invested
|Diversification problems – Due to the investor’s lower level of investment, the diversity is reduced
Cash Account Is Safer But Margin Account Offers Other Benefits
Cash accounts are great for beginners who are just starting in the world of finance and trading stocks. It is a safer option that gives you time to get to know how the platform operates. However, those that have advanced in the trading business can opt for margin accounts.
Even though additional risks are involved, margin accounts provide users with an opportunity to leverage securities and funds that are owned and, in this way, purchase more securities. This is beneficial for increasing returns. The only prerequisite is for the account to have at least $2,000 in cash or some equity.
What Are the Pros and Cons of Margin Accounts?
The pros and cons list for margin accounts is different, and it features different benefits and risks from the cash accounts. Here is what you need to know about the positive aspects of margin accounts:
- Opportunity for increasing gains – Your gains can be enhanced since you are allowed to borrow funds in order to trade more shares of stocks.
- Short-term cash flows can be maximized – There are no Webull fees for maintaining a margin account, but one should know that interest is charged on the funds the user borrows.
- Options – Webull options can be actively sold or bought.
Here is a list of risks and negative sides that users need to consider and be aware of before getting approval for their account:
- Forced sales – Sometimes problems can arise with both investors and borrowers. Assets are always at risk of dropping in value to the amount that is owed. In this instance, the broker will typically ask the investor for more cash. Brokers can sell the shares in case the investor refuses to do this.
- Interest payments – When borrowing money, it’s necessary to pay the interest.
- The losing principal – Owners of margin accounts are always at risk of losing the money they borrowed as well as the money they owned.
What Are the Main Differences Between the Two Accounts?
Once you know the key features, pros, and cons of each account it should be best to outline the key differences between them that will help you choose when setting up your Webull account. Don’t miss key details that would be beneficial for the trading experience.
Cash account owners will get to focus primarily on settled and unsettled funds to trade. But, what are unsettled and settled funds? Unsettled funds are considered to be the amount of money that one receives when the positions get liquidated during the previous two days.
When they are completely settled, they get turned into settled funds. Only then are these funds considered a buying power, and one can withdraw them immediately.
However, owners of margin accounts can make trades with unsettled funds. One cannot commit any violations when doing this. What one gets when selling positions will become buying power immediately.
Cash accounts are limited. You can only spend the funds that are in your account. Buying power is considered to be the money that you have deposited into your account. However, buying power is different for margin accounts. You can leverage your own money and owned securities and use them to buy extra securities. There are two types of buying power with this account and they are called “Overnight Buying Power” and “Day-Trading Buying Power.”
There are prerequisites for withdrawing money from cash accounts. One can only withdraw the amount which is already in the user’s account. Bear in mind that funds have to be completely settled before they are withdrawn.
For margin accounts, the situation is different. One can withdraw the amount that is allowed to be borrowed as well as the amount on the balance. Margin-held securities determine the borrowing amount.
We Recommend Using a Cash Account First and Then Switching to a Margin Account
It’s best to set up a cash account when you first start trading. Since it involves fewer risks, and you won’t have to deal with leveraging and borrowing, you will have less to think about and more time to learn about trading. Once you are sure of your trading capabilities, it’s safe to set up a margin account and trade with confidence.