Cash Accounts: Simple, Leverage-Free Investing
A cash brokerage account is the simplest account type — you deposit cash and buy securities when you have sufficient settled funds. Unlike margin accounts, you cannot borrow, you cannot lose more than your deposit, and you will never receive a margin call. Over 80% of individual brokerage accounts are cash accounts.
Cash accounts are the default brokerage account for most investors. You open the account, deposit funds (via bank transfer, check, or wire), and when the cash settles (typically 1 business day for bank transfers), you can buy securities. When you sell securities, the proceeds settle in T+1 (one business day), after which you can withdraw the cash or use it to buy more securities. The key rule is that you must have sufficient settled cash at the time of purchase to cover the trade. This prevents you from buying securities on credit, which keeps your risk limited to the assets in your account.
The SEC and FINRA have specific rules for cash accounts to prevent "free-riding" — buying and selling securities without sufficient funds to pay for them. If you buy a stock with unsettled funds (from a recent sale) and then sell that stock before the original sale settles, you create a "Good Faith Violation" (GFV). Three GFVs in a 12-month period results in a 90-day restriction — during which you can only trade with fully settled cash. Pattern day trader rules (PDT) do not apply to cash accounts — you can make as many day trades as you want as long as you have settled cash for each purchase.
Real-world example: An investor with a $10,000 cash account buys $5,000 of Apple on Monday with settled cash from their bank transfer. On Wednesday, they sell Apple for $5,500 (profit of $500). The proceeds settle on Thursday (T+1). On Thursday, they buy $5,000 of Microsoft with settled cash. If they sold Microsoft on Thursday (before the cash fully settled) and tried to buy another stock with that money, they would commit a Good Faith Violation. The rule ensures the investor is not trading on credit. Understanding these settlement mechanics is essential for active traders in cash accounts.
Cash Account Advantages and Limitations
Advantages: no borrowing, no interest charges, no margin calls, no forced liquidation (you cannot lose more than you deposit), simpler tax reporting, applicable for retirement accounts (IRAs), no pattern day trader restrictions. Limitations: cannot short sell, cannot use leverage, must wait for funds to settle before buying (T+1), can trigger Good Faith Violations if you are not careful with settlement timing, cannot participate in certain options strategies that require margin. For long-term buy-and-hold investors, cash accounts are perfectly sufficient. For active traders, short sellers, or options strategists, a margin account is necessary. The vast majority of retirement savers should use cash accounts exclusively.
FAQs
What is the difference between a cash account and a margin account?
In a cash account, you can only trade with settled cash. You cannot borrow from the broker. In a margin account, the broker lends you money to buy securities, using your holdings as collateral. Cash accounts never incur interest charges or margin calls. Margin accounts allow leverage, short selling, and advanced options strategies but carry the risk of forced liquidation. Most investors should start with a cash account. Upgrade to a margin account only when you understand the risks and have a specific need for borrowing or short selling.
Can I day trade in a cash account?
Yes — the Pattern Day Trader (PDT) rule only applies to margin accounts. In a cash account, you can make unlimited day trades as long as you have sufficient settled cash for each purchase. The "settled cash" requirement is the limiting factor: if you buy $5,000 of stock and sell it the same day, you cannot use those sale proceeds again until they settle (T+1). This limits your day trading capacity to the amount of settled cash you have. High-volume day traders typically use margin accounts to avoid settlement delays — but then they must maintain $25,000+ equity to avoid PDT restrictions.
How do I withdraw money from a cash account?
You must have settled cash to withdraw. After selling a security, wait for T+1 settlement, then you can withdraw the cash (typically via ACH transfer to your bank, which takes 1 business day, or wire transfer for same-day, which may have a fee). Some brokers offer instant withdrawal to a linked debit card. Dividends are available for withdrawal on the payable date. You can also withdraw cash from unsettled positions — but this would be a margin violation in a cash account. Most brokers require a minimum of $0.01 to $1.00 to remain in the account.