What Is a Cash Account and How Does It Work?

Astarot / Getty Images/iStockphoto

Commitment to Our Readers

GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.

20 Years
Helping You Live Richer

Reviewed
by Experts

Trusted by
Millions of Readers

A cash account is a brokerage account where you can only trade with money that you’ve actually deposited, as opposed to trading based on borrowing, credit or margin.

Cash Account: At a Glance

• You can only buy securities with settled cash that’s already in your account.
• Unlike margin accounts, you don’t have the ability to borrow money from your broker. 
• There are no interest charges or margin calls.
• These accounts are subject to settlement rules, which is often one or two business days. 
• They’re often best for long-term investors and those avoiding debt.
• Cash accounts are typically lower risk but have less flexibility than margin accounts. 

What Is a Cash Account?

A cash account is the most straightforward type of brokerage account. You can only buy stocks, bonds, exchange-traded funds (ETFs) or mutual funds using the cash you’ve already deposited once it’s settled.

This makes cash accounts different from margin accounts, which allow you to borrow funds from your brokerage to purchase financial securities. So if you have $5,000 available in a cash account, you can invest up to $5,000, but nothing more.

When you open a brokerage account without requesting margin privileges, you typically receive a cash account by default.

Cash Accounts vs. Cash Management Accounts vs. Bank Accounts

While these terms sound similar, they describe different products:

• Cash accounts: Brokerage accounts for buying investments with settled cash.
• Cash management accounts: Hybrid accounts that combine checking account features like debit cards or bill pay with brokerage services.
• Bank accounts: Traditional checking or savings accounts at banks. These are typically FDIC-insured and designed for daily spending, as opposed to investing.

How Cash Accounts Work

A cash account starts with depositing money in a brokerage account. Once the deposit arrives and is available — which is usually within one to three business days — you can purchase securities.

Settlement timing is important to keep in mind here. When you buy or sell securities, the transaction doesn’t clear immediately. Stocks, bonds and ETFs typically settle on a T+1 basis, which means the trade date plus a single business day. 

For example, if you sell stock for $6,000 on Monday, you’ll likely have access to that cash by Wednesday once it’s settled. On Wednesday, you’ll be able to reinvest that $6,000 into new securities.

Cash Account vs. Margin Account

Here’s a side-by-side look at how cash accounts and margin accounts compare:  

Why Cash Accounts Are Considered Safer

Cash accounts eliminate several major risks that come with margin trading.

• You can’t lose more than you invest: Your maximum loss is 100% of the funds you deposit into the account. Margin accounts allow you to borrow from a brokerage, so losses can exceed your initial investment because you’re trading with borrowed money.
• No interest charges: Margin accounts charge interest on borrowed funds, which can be as high as 10% or more. Cash accounts, however, never change interest because you aren’t borrowing funds.
• No margin calls: When a margin account’s value drops below required levels, brokers will either demand immediate additional deposits or force the liquidation of your holdings. Cash accounts can’t trigger margin calls. 

While trading with borrowed money can amplify your potential gains, it can also increase your risk significantly. This can result in overselling or excessive risk trading. Cash accounts enforce natural position size limits, reducing risk overall.  

Limitations of a Cash Account

There are several limitations of cash accounts to keep in mind:

• Reduced buying power: You can only invest what you actually have, which could theoretically slow down potential gains.
• Settlement waiting periods: You’ll need to wait one to two days after selling before you can reinvest cash into new securities.
• Difficult day trading: Day trading requires substantial capital since you can’t reuse unsettled funds.
• No short settling: Cash accounts don’t allow short selling, which requires borrowing shares. 

Common Cash Account Violations and How To Avoid Them

There are two common cash account violations that you want to avoid.

• Good faith violation: This happens when you buy securities with unsettled funds, and then sell them before the original funds settle. For example, you might sell Stock A on Monday, which settles on Wednesday. But on Tuesday, you buy Stock B with that unsettled cash, and then sell it on Wednesday. That’s a violation. 
• Freeriding violation: This involves buying securities with unsettled funds and selling before you pay for them with settled cash. This can result in account restrictions.

To avoid these violations, you can: 

• Keep extra cash as a buffer in your account.
• Track settlement dates carefully — most brokers show available cash versus total cash.
• Wait until the full settlement period before reinvesting proceeds from sales.  

Who a Cash Account Is Best For

Cash accounts may be best for:

• New investors: You can benefit from the simplicity and built-in risk controls, and you can’t get in over your head with borrowed money.
• Long-term buy-and-hold investors: If you make occasional purchases, hold for a while, and rarely bump against cash account limitations, cash accounts can be a great option.
• Anyone avoiding debt or complexity: Cash accounts can align with these values, especially if you don’t want the psychological burden of trading with borrowed money.
• Retirement account holders: Retirement accounts like traditional individual retirement accounts (IRAs) and 401(k)s are often structured as cash accounts by default.

Who Might Prefer a Margin Account

• Active traders making multiple trades weekly or daily may find that cash account settlement rules are too restrictive.
• Pattern day traders — who make four or more trades within five business days — need margin accounts to meet regulatory requirements, and they need to maintain a $25,000 minimum balance. 

Can You Have Both a Cash and Margin Account?

Yes, you can have both a cash account and a margin account. Many investors have both account types, either at the same brokerage or across different brokerages. 

You may choose to keep a cash account for long-term retirement investing, for example, while maintaining a separate margin account for more active trading. This separation helps provide clear boundaries between strategies, and can help make sure you don’t take too many risks with your retirement funds. 

You can also convert a cash account to a margin account by completing additional paperwork and meeting minimum balance requirements. Each brokerage might have slightly different processes for conversions.

How To Open a Cash Account

To open a cash account, follow these steps: 

1. Choose your brokerage: Compare commissions, available investments, research tools and customer service. Most major brokers now offer commission-free stock and ETF trading.
2. Complete the application: You’ll provide information like your Social Security number, employment details and your financial background. This typically takes 10 to 15 minutes. 
3. Select an account type: Choose “cash account” or leave the margin options unchecked.
4. Fund your account: Link your bank account for electronic transfers. Initial deposits typically arrive within one to three business days.
5. Start investing: Once your funds settle, you can start purchasing securities right away.  

Key Takeaways

• Cash accounts are a good option for beginners or risk-averse investors. 
• Unlike margin accounts, you can only buy securities with settled funds.
• Retirement accounts are typically structured as cash accounts by default.
• Many people have both cash accounts and margin accounts to take advantage of the benefits of each. 
• Track your settled funds carefully to ensure that you aren’t committing violations that could result in account restrictions. 

Share This Article: