How Does a Cash Account Work?
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A cash accounts is a brokerage account that requires you to render full payment for a transaction by the agreed upon settlement date. This differentiates it from a margin account, which grants the investor the privilege of buying on the margin, or using borrowed money from a broker in order to buy securities on the stock market (for which the broker charges you a nominal rate of interest). This type of account is sometimes also referred to as a “special cash account.”
Cash accounts are regulated by something called Regulation T, which specifies that you may borrow up to 50% of the purchase price of securities if you are buying on margin. Regulation T does not allow this function in a cash account. With a cash account, you deposit cash in the account, and then use that cash to buy stocks, mutual funds, or any other type of investment. It’s basically that simple.
Individual retirement accounts, or IRAs, are a good example of a cash account. An IRA is funded exclusively with cash deposits, which are then invested by the brokerage. The investments undertaken by the broker in an IRA tend to be low risk investments, encouraging moderate but consistent growth of the account. Trust funds for minors or dependent children are also commonly administered as cash accounts. The structure of these types of accounts typically sets restrictions on how the funds may be used, who can access them, and how much of the principal balance may be withdrawn during any calendar year.
If you are looking for a stable investment account with dependable but modest growth, a cash account may be the best brokerage account for you. If your goal is to establish a nest egg for retirement, or provide financial stability for your children’s future, you might want to look into the option of opening a cash account.
