Cash Account

A cash account is a type of brokerage account where an investor must pay in full for all securities bought. Unlike a margin account, which allows borrowing money to trade, a cash account only permits trading with the funds available in the account.

Key Features of a Cash Account:

• No Borrowing: Investors use their own money to purchase stocks, bonds, and other securities. There is no leverage involved.
• Simpler Risk Profile: Since there’s no borrowing, there’s no risk of a margin call or owing more than the account balance.
• Settlement Period: After a trade is made, the investor must wait for the trade to settle before they can use the funds for another trade. The settlement period is typically T+2 (2 business days).

Advantages of a Cash Account:

• Lower Risk: No margin means the investor can’t lose more than the amount invested.
• No Interest Payments: Since funds are not borrowed, there are no interest charges associated with trades.
• Simplicity: Cash accounts are ideal for beginners who want to avoid the complexities and risks of margin trading.

Limitations of a Cash Account:

• No Leverage: Without borrowing power, cash accounts restrict the ability to amplify gains through leverage.
• Cash Availability: The investor must have enough available funds in the account to make purchases. If funds aren’t available, trades can’t be executed.

A cash account is typically recommended for conservative investors who prefer a low-risk approach to investing without the potential downsides of margin trading. See also: Margin