Trading Accounts - For Beginners

Introduction

There are two types of accounts. CASH vs MARGIN. Every broker will have same rules except some broker specific rules that can vary a bit. I have used TD Ameritrade, Robinhood, e-Trade, ustocktrade and Webull. So i will explain how this works in Webull which I predominantly use for my day trading.

Cash Account

• With the cash account you trade with the money you put in.
• Lets say you put 5,000$ in your cash account in Webull and its completely transferred into your trading account (Webull gives you initial credit of x dollars until its deposited fully from bank). You have 5,000$ available for trading. All of it !!
• Day 1 of trading - Monday
• You bought a stock ABC for 2,000$. Now you have 3,000$ in cash and 2,000$ in ABC securities.
• You bought another stock XYZ for 3,000$. Now you have used up all of your cash into buying ABC and DEF securities. Now you cant buy any further as there is no cash remaining.
• Lets say you sold ABC for 2,000$, say breakeven. No loss no gain.
• Now you have 2000$ cash and you can buy any stocks with that. Your remaining 3,000$ is still in DEF Stock remember. 
• But here is the catch !!! Funds settlement- which comes into play after T+2days. Confusing, isn't it ? 
• What is T+2 ?
• Basically you have to wait for T+2 settlement days which is T - Day 1 of transaction + 2 more days. So Wednesday you can sell your shares preferably close of day.
• You cant sell them until the original cash (from transaction of selling ABC) is settled.
• Why T+2 ?
• You basically sold your securities and converting them into cash which has to go through a process such as transfer of ownership, fund settlement etc..
• So, what happened here is although you started the Day-1 with 5,000$. Now you have 3,000$ in DEF stock which you haven't sold yet and 2,000$ in cash which is unsettled on Day-1.
• The good thing
• Although you have unsettled funds of 2,000$ you can buy stocks with it. But the real catch is, you can't sell them until the funds are settled (T+2).
• Day 2 of trading - Tuesday
• Your cash is still unsettled But you can still buy stocks but not sell them.
• Day 3 of trading - Wednesday
• Finally the wait is over, the 2,000$ from Monday's transaction is settled. you can buy and sell stocks worth the 2,000$ cash in your account or if you already bought stocks with that unsettled funds, now you can start selling them.
• Note: Webull lets you do unlimited day trades (not restricted to 3 day trades per 5 business days) unlike many other broker with the cash you have, only catch being T+2 which is quit common across broker. So if you are beginner with small amounts of trading then you could live with this.

Margin Account

• Alright, I want unlimited day trades but I also want my cash available immediately. Well, you need to leverage the broker here. And its called a leverage for the same reason.
• Basically the broker will give you his funds so you can use his funds for trading. Very risky for beginners and its a deeper subject to go through. I shall explain that in my another blog.
• But lets say you want unlimited day trades and you also need the cash immediately without waiting for T+2 settlement. The only way to do is get 25k on that account. And enable yourself as PDT (Pattern Day Trader).
• Once you do this you have unlimited day trades and immediate settlement - no waiting for T+2 days.
• Now for examples:
• You bought stock ABC for 5000$. Now you have cash 20k and stocks 5k.
• so 20k is available from your cash for further trading. Wait, i told you about leverage, Webull broker offers you 4x times the account. which means you can technically buy 100k worth of stocks. But dummy, lets not get there yet. That's the risk you need to know :) so you are aware of trading with your own cash.
• alright, now you got 20k available and you can use that to buy more stocks. lets say you bought DEF for 20,000$. Now you have used up all your cash and you can leverage broker's money. But lets stop here for beginners and basics.
• Lets say you sold all your stocks in the middle of Day-1, remember you are a day trader. and you got 5k more profits. So your account is now 30k. Wow, now you have 30k of your own cash and you can buy shares using that 30k. No waiting for T+2. Hurray !!
• But remember you need to have 25k or more end of the day to continue as pattern day trader or you will be slapped with restrictions from the broker, potentially pausing your trading.