Cash Account

What is a Cash Account?

A cash account is a brokerage account type in which the investor must pay the full amount for securities purchased. So, if you buy 100 shares of a company at a price of $100 each, you have to have $10,000 in your account to complete the transaction. There is no way to borrow money from the bank or broker to execute the trade as it would be in a margin account.

Cash accounts are considered more conservative since leverage and margin trading are not permitted. All transactions must be funded using the investor’s own cash or settled funds from previous trades.

Cash Account vs Margin Account

The main difference between a cash account and margin account is the ability to trade on margin. A margin account allows borrowing money from the broker to purchase securities using leverage, while cash accounts do not allow any lending or margin trading.

Margin accounts provide more buying power but also carry more risk, while cash accounts provide less buying power but no risk of a margin call or interest charges.

That means both have their benefits, and it mainly depends on your trading and investment style if the one or the other account type is right for you.

For investors who want to hold positions long-term, the cash account is a great choice because they can never make the big mistake of investing more money than they have, and they would never have to pay interest on their positions.

On the other hand, if you are a day trader, the margin account is the only way to go because only with a margin account where you are able to trade frequently with your full buying power without having to wait for the settlement date.

How Cash Accounts Work

In a cash account, an investor must pay in full for any securities purchased and cannot borrow funds from the brokerage.

Cash accounts follow the newly introduced “one day settlement period” rule (effective beginning on May 28, 2024), where trades must be paid for within 1 business day. For selling stocks, proceeds cannot be accessed until the trade settles. Cash accounts are simpler, with no margin interest charges or margin call risks.

Requirements for Cash Accounts

To trade in a cash account, the basic requirement is having enough settled cash on hand to cover the full purchase price of securities plus commission costs. If you don’t have enough settled cash, you can’t trade.

There are also equity holding requirements, such as the 90-day rule preventing using unsettled funds from a stock sale to purchase other securities. Cash accounts have trade delays and funding requirements in place to prevent freeriding violations.

Pros and Cons of Cash Accounts

The main advantages of cash accounts are no margin interest, reduced risk from no leverage, and simpler trading requirements.

The downsides are having less buying power than margin accounts, trade delays from settlement periods, and equity holding requirements, which reduce trading flexibility.

Cash accounts avoid margin calls but have lower return potential without leverage.

Cash Account Trading Rules

Cash accounts have several specific trading rules enforced by brokers. This includes the T+1 settlement period, where trades must be paid within 1 day. This new rule was implemented by Finra, effective May 28, 2024.

Before that date, the settlement period was T+2, and in some cases, even T+3 in cash accounts. The new rule is beneficial to clients since they now quickyl have access to their full account funds quickly.

The 90-day equity holding rule prevents using unsettled sale proceeds to purchase new stocks. Cash accounts also cannot maintain open orders while having outstanding settled fund deficiencies to prevent freeriding.

Examples of Cash Accounts

Major brokers like Fidelity, Charles Schwab, TD Ameritrade, E*Trade, and TradeStation all offer cash accounts that follow the standard rules outlined above, compared to their margin account options with margin lending abilities.

Alexander Voigt, CEO
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Alexander Voigt is the founder of DayTradingZ, was a regular contributor to Benzinga and has been featured and quoted on leading financial websites such as Investors.com, Capital.com, Business Insider and Forbes.