Stock Broker Account Types Explained: Cash, Margin and Custody

Cash Accounts: Trading With What You Own

A cash account is the simplest setup. You deposit money, you buy securities, and every trade settles with funds or shares you already have. If you want to buy €1,000 of stock, you need €1,000 sitting in your account. No borrowing, no leverage, no complexity.

Most European brokers open you in a cash account by default. Trading 212, eToro, and XTB all start retail clients this way. You can hold stocks, ETFs, and sometimes bonds depending on the platform. The key restriction is settlement timing: when you sell a security, the proceeds usually take two business days to settle before you can withdraw them, though you can often reinvest immediately.

Cash accounts protect you from one specific risk: you cannot lose more than you deposit. If a stock goes to zero, you lose your investment but you owe nothing. This matters more than it sounds because the alternative, margin accounts, can leave you with debts larger than your initial capital.

Margin Accounts: Borrowing to Amplify Returns

A margin account lets you borrow money from your broker using your existing holdings as collateral. If you deposit €5,000 and your broker offers 2:1 margin, you can control €10,000 worth of securities. The broker charges interest on the borrowed amount, and the rate varies widely by broker and account size.

Interactive Brokers offers margin to clients who meet suitability requirements, with interest rates tied to benchmark rates plus a spread that shrinks as your loan balance grows. Saxo Bank provides margin but typically at higher rates for smaller accounts. Most app-based brokers like Trading 212 and eToro do not offer traditional margin for stock purchases, though eToro does offer leveraged CFD positions which work differently.

The danger is two-fold. First, losses amplify just like gains. A 20% drop in a position bought with 2:1 margin wipes out 40% of your equity. Second, if your account value falls below the maintenance margin requirement, the broker will issue a margin call demanding you either deposit more cash or sell holdings. If you do not act fast enough, the broker sells your positions automatically, sometimes at the worst possible moment. Margin is a tool for experienced investors who understand position sizing and can stomach volatility without panicking.

Custody Models: Where Your Shares Actually Live

Custody describes the legal and operational framework for holding your securities. This matters because if a broker fails, the custody model determines how easy it is to get your assets back.

Segregated custody means your shares are held in a separate account, legally distinct from the broker's own assets. If the broker goes bankrupt, your shares are not part of the bankruptcy estate. They belong to you, and the administrator can transfer them to another broker or return them. Most European brokers use segregated custody for stocks and ETFs. Interactive Brokers, Saxo Bank, and XTB all segregate client assets as required by MiFID II rules in the EU and similar frameworks in the UK and Switzerland.

Omnibus custody pools all client holdings into a single account at the custodian, with the broker maintaining internal records of who owns what. This is cheaper to operate and common in the US, but introduces a layer of operational risk. If the broker's records are wrong or disputed, untangling ownership takes longer. Some brokers use omnibus structures for certain asset types or markets, so it is worth checking the client agreement. The key protection in Europe is that even in omnibus arrangements, client assets must still be separated from the broker's proprietary assets.

A third model, synthetic exposure, is not actually custody at all. When you trade CFDs on platforms like Plus500 or eToro's leveraged positions, you do not own the underlying share. The broker takes the opposite side of your trade, and your profit or loss is a contract with the broker, not a claim on a real security. This is faster and often cheaper for short-term trades, but you get no voting rights, no dividends in the traditional sense (you may get dividend adjustments), and your exposure depends entirely on the broker's solvency.

How Account Type Affects What You Can Trade

Cash accounts usually limit you to simple long positions: you buy a stock or ETF and hold it. You cannot short sell in a cash account because shorting requires borrowing shares you do not own. If you want to profit from a falling price in a cash account, you need inverse ETFs or put options, and many European retail brokers do not offer options at all.

Margin accounts unlock short selling, options trading, and more complex strategies. Interactive Brokers and Saxo Bank allow short selling in margin accounts, though you will pay a borrow fee for hard-to-borrow stocks. The fee is deducted daily and can be steep for heavily shorted names. You also face the risk of a buy-in: if the broker cannot find shares to borrow anymore, they close your short position automatically.

Some brokers blur these lines by offering CFDs within what they call a cash account. eToro lets you buy real stocks with no leverage in the same account where you can trade leveraged CFDs on indices or commodities. Technically, the stock portion behaves like a cash account and the CFD portion like a margin account, but the interface does not split them. This flexibility is convenient but requires discipline because it is easy to forget which positions carry leverage and which do not.

Investor Protection Schemes and Account Types

European investor protection schemes cover cash and margin accounts differently. In the EU, the Investor Compensation Scheme Directive requires member states to protect clients up to €20,000 if a broker fails, though many countries offer more. The UK's FSCS covers up to £85,000 per person per firm.

These schemes cover cash balances and securities held in custody. If your broker goes under and your shares are properly segregated, you should get them back without needing to claim from the compensation scheme. The scheme is a backstop for cases where assets are missing or the broker commingled funds improperly. Margin loans are debts you owe, so protection does not erase them. If you have €10,000 in equity and €5,000 in margin debt when a broker fails, you are owed €10,000 in assets and you still owe €5,000.

CFD positions are not covered the same way because you do not own the underlying asset. If the CFD broker fails, your position is a contract claim, not a segregated security. Some CFD brokers are covered under the same schemes, but the recovery process is messier. This is one reason why long-term investors prefer real shares in segregated custody over synthetic products.

Which Account Type You Probably Need

If you are investing for the long term, building wealth through regular contributions, a cash account with segregated custody is the right choice. You avoid the interest costs and psychological pressure of margin, and you get the simplest legal structure if something goes wrong. Trading 212, XTB, and the stock portion of eToro all fit this profile for European investors.

Margin makes sense only if you have a specific, repeatable edge and the temperament to handle leverage. Professional traders use margin to capitalize on short-term opportunities without leaving cash idle, but they also have stop-loss disciplines and risk limits that most retail investors do not. The brokers that offer proper margin accounts, like Interactive Brokers and Saxo Bank, also have the tools and data to manage that risk, but the tools do not use themselves.

Check your broker's terms before you assume anything. Some platforms label accounts as "margin" even when they do not lend you money, simply because the account can hold multiple currencies or settle trades on a different timeline. Others bundle real shares and CFDs in one login, so your account type is effectively hybrid. Read the client agreement section on settlement, borrowing, and custody. If it is not clear, email support and ask directly how your cash is held, whether your shares are segregated, and what happens if you try to buy more than your cash balance allows.