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Last updated on August 29th, 2022 at 03:40 am
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Many new Robinhood users wonder “is Robinhood cash or margin account?” This is especially confusing on Robinhood since the way they set up their accounts is different than other brokerages.
If you’ve just started using Robinhood then you have a margin account by default. This is the free account — also called Robinhood Instant — that every user who signs up for the trading platform gets.
Having a margin account is associated with high risk but in reality what a Robinhood Instant account allows you to do is to trade stocks immediately after making a deposit (with the first $1,000) and also allows you to use your money from a sale of a stock/option immediately (rather than having to wait for the sale to settle).
So although Robinhood Instant is technically a margin account it doesn’t function as a normal margin account would by increasing your risk dramatically.
In this article, I’m going to give you more insight into both account types and help you figure out how to switch from a margin account to a cash account on Robinhood.
If you are a day trader, you wouldn’t be able to use Robinhood without a Cash account due to the day trading limitations that come with a standard Instant margin account (unless you have over $25,000 in your account).
So it’s important to keep that in mind as well.
Let’s discuss how you can potentially switch to a cash account too and how you can benefit from doing so.
Is Robinhood A Cash Or Margin Account?
All accounts on Robinhood are margin by default. Even if you don’t use margin (called a Limited Margin account by some brokers).
To actually access the margin you need to sign up for Robinhood Gold.
This is in contrast to basically every single other broker where a cash account is the default and you need to qualify for a margin account.
A margin account will allow you to make 3 day trades within a 5 day period or unlimited day trades if your account value is above $25k.
As mentioned above, having the default margin account on Robinhood also allows you to trade far faster than you would with a normal cash account.
How Do You Switch To A Cash Account On Robinhood?
- Open up your Robinhood app and tap the little person icon in the bottom right-hand corner. Then, tap the three lines in the top right corner to get to your menu.
- The first option in your menu will say Investing. Tap this to get to the Investing screen where you’ll have the options to change several settings for your Robinhood account. You’ll first see your portfolio value and breakdown
- Scroll down past this to access various options for your account. From here you can do things like enable divided reinvestment, manage options trading, and finally, at the very bottom, change your Day Trade Settings.
- Tap Day Trade Settings to get to a screen that gives you information about your day trades. Even if you don’t want to change your account from margin to cash, it’s still a good idea to know where to find this information about your day trades.
If you are trading with a margin account under $25,000 in the US, you are subject to the PDT rule (Pattern Day Trader) which prevents you from taking more than three day trades in a five day period.
The Pattern Day Trade Protection button will automatically be activated. This prevents you from accidentally taking more than the maximum three allowable day trades.
Penalties for violating the PDT rule include account liquidation and getting your account frozen for 90 days. Keep the PDT protection on if you are day trading with a Robinhood margin (or instant settlement) account.
- To switch to a cash account, simply tap Turn Off Instant Settlement at the bottom of the screen. You’ll get a confirmation message that warns that you’ll need to wait 3-5 days for funds to settle before they can be reinvested. This action is permanent.
What Are The Benefits Of A Margin Account On Robinhood?
When you sign up for a new account, you’ll start with Robinhood Instant or “instant settlement” by default.
With Instant, you’ll have access to instant deposits (up to $1,000) and extended-hours trading.
You’ll also have the ability to trade on unsettled funds, which means you won’t have to wait for your funds to process when you sell securities.
If you’re approved for options trading, you will be able to enter options trades that require a margin account as well. However, you will not have the option to purchase securities on credit (what’s traditionally called “margin investing”) with an Instant account.
All customers start out with an Instant account, which is a margin account, so that they can access funds before they’ve settled and enter options trades if they’re approved.
Even if you’ve never borrowed money in your account, this account type is still classified as a “margin” account from a regulatory standpoint. As a result, it will appear as such on your annual tax documents and monthly account statements.
What Are The Benefits Of A Robinhood Cash Account?
A Robinhood Cash account has some definite perks that you might be interested in as a new or even intermediate investor.
This account lets you place trades during both the standard and extended-hours trading sessions. As with all trades, there are no commissions charged by Robinhood.
However, you won’t have access to instant deposits or instant settlements.
With an instant account, you do not have to wait for your funds to process when you sell stocks or make a deposit. Robinhood Instant is the free, default account type.
The Robinhood Cash Account does not let you invest on margin. There are some major red flags when it comes to margin trading.
Margin involves the risk of greater financial losses and is not the right choice for all investors.
If you are new to investing, you may want to seriously consider taking a more conservative approach.
Should You Upgrade To Robinhood Gold?
A Robinhood Gold account is similar to a Robinhood Instant account, but can give you access to more buying power through margin investing and larger instant deposits.
Like with an Instant account, a Gold account gives customers access to funds before they’ve settled.
And like with an Instant account, if you’re approved for options trading, you will be able to enter options trades that require a margin account.
With Robinhood Gold, if eligible, you can also enable margin investing, which can give you access to borrowed funds for trading.
Even if you do not have margin investing enabled, there are a few limited scenarios in which you may still utilize margin or borrowing.
With Gold, you’ll also have access to level II Data and advanced market research. A Gold membership costs $5/month.
So… is Robinhood cash or margin account?
As I covered in this article, every Robinhood user starts out with a margin account by default. However, the margin account (Robinhood Instant) doesn’t allow you to trade with money that you don’t have.
It just allows you to trade with money that hasn’t cleared into your account yet (from a deposit or sale of a stock/option).
You can change this to a cash account by following the steps listed above if you choose to but for most people, an Instant account is the best option.