Cash Account Definition

When opening a brokerage account you have the option to open different types of accounts depending on what you are looking to do. You can open a joint account, individual account, cash account, margin account and many others but the one we are going to talk about today is the cash account.

It’s a simple account that allows you to use only your cash available to purchase financial securities like stocks, options, ETFs, mutual funds and fixed income products.

There are a couple of advantages and disadvantages for opening a cash account compared to a margin account, especially if you are an active trader. Cash accounts allow you to only use the available cash in your account and the funds must follow Regulation T rules.

This means that when you buy or sell a security they will be considered unsettled funds until two days after the execution when the trade exchange finalizes between clearing firms.

Cash Account Settlement Rules

For stocks, it is the trade date plus two trading days for cash to settle while for options it is only the trade date plus one trading day for the funds to settle. So if you buy an option on Monday and sell it on Tuesday, then those funds won’t clear until Wednesday.

If you buy a stock on Monday and sell on Tuesday, those funds won’t settle until Friday. This is a major drawback for active traders as you have to wait for those funds to settle before using them again.

One major plus side to cash accounts is you can day trade all you want as long as you have settled funds and won’t be held to the pattern day trading rules in a margin account.

There is also no equity requirement to day trade in a cash account, which is a huge bonus for traders who don’t have the extra $25,000 lying around.