What is a Cash Account? – Defined & Explained

Investing can feel like overwhelming for some people, especially when faced with so many different types of accounts. For example, you might wonder what a cash account is and how to use one.

Cash accounts represent one type of brokerage account that functions only on the funds that are available in the user’s account. Investors must cover the full cost of any trades and cannot borrow money from their broker to make more transactions.

Understanding the features, pros and cons of this type of brokerage account can help you make an informed decision about whether it’s the right choice for you.

Cash Account Definition

Cash accounts allow you to trade with a set amount of money in an account. You could deposit more money and withdraw funds or transfer your money to another trading platform.

You don’t take loans out, and all transactions require payment in full before entering into a trade. These restrictions make cash accounts safer than other brokerage options, such as margin trading.

How a Cash Account Works

The process is straightforward and provides a level of stability you won’t find with other broker account types. You simply set up an account, deposit funds and then use those funds to purchase securities.

However, your funds need to be fully available to cover the purchase price, and there is typically a delay in those transfers to ensure you have sufficient funds in your account to cover the trades.

Depending on your broker, it can take up to two business days for trades to settle, meaning you can’t withdraw the cash for a few days. Another option with cash accounts is a cash sweep program.

Some providers offer these programs to put uninvested money to work. If you opt into the program, the broker uses your uninvested funds and sends them to banks or real estate investment trusts (REITs).

With bank investments, the funds become FDIC-eligible, meaning you can collect interest on the amount.

Examples of Cash Accounts

You can set up cash accounts with many trading platforms, but it helps to read some examples of how the systems work.

Webull

Webull is one provider that offers cash accounts for customers so that they can trade stocks and exchange-traded funds (ETFs) without paying commissions or fees.

Say you deposit $1,000 in a Webull cash account. You then pay $500 to purchase shares of Amazon. Since you have funds available to cover that $500 and still have money left over, you pay no interest or fees on the trade.

A week later, that Amazon stock climbs in value, so you decide to sell your shares. You receive $800 for those shares.

Webull’s cash accounts involve a two-day trade settlement period, so you don’t get to use the $800 from that sale for two business days.

Robinhood’s Cash Sweep Program

Robinhood is a brokerage app that lets users participate in a cash sweep program. Your uninvested cash sits in a FDIC-insured bank account and collects interest.

The platform outlines its program in detail — six banks handle the accounts, with a total maximum insurance coverage of $1.5 million. Users who participate in the program earn a variable interest rate with the annual percentage yield of between one and four percent.

Benefits of a Cash Account

There are many reasons to choose a cash account for trading, including minimizing your risk.

• Lending – lending options, such as Robinhood’s cash sweep program, are gaining popularity because they are easy to use and provide flexibility for investors. This can be especially beneficial for traditionally risky options, such as stocks.
• Buy securities instantly – buying securities with a cash account is quick and easy because you must have the funds available immediately. You don’t have to wait to make a trade or purchase as long as the money is available in your broker account.
• Liquidity – is a key advantage for cash accounts because you can buy securities and access funds efficiently. Since the money is in your account, you can move it around at will.

Disadvantages of a Cash Account

While cash advantages are beginner-friendly and have some notable advantages, there are some limitations to consider.

• Takes 1-2 business days to transfer funds – Cash accounts are praised for efficient transactions, but there’s usually a one to two business day turnaround when buying and selling assets. Some stockbrokers might offer quicker transfers, but this is not common. Be sure to check your broker’s policy so you can plan your moves accordingly.
• No dividend income – The major drawback is a lack of dividend income. You can’t earn dividends on investments; you can only grow your money through successful trading.

Cash Account vs. Margin Account

Cash accounts and margin accounts are two common types of brokerage accounts. Both types let you invest in stocks, mutual funds, and ETFs.

The funding source is the main difference between the two account types. While cash accounts require you to make every purchase with your available funds, margin accounts let you leverage existing investments to borrow from your broker.

For example, if you needed more money to make new trades, you could use part of your existing portfolio’s value to borrow funds from your provider. Margin accounts boost purchasing power and may yield better returns, but there’s more risk associated with trading on loans.

Criteria	Cash Accounts	Margin Accounts
Fund Source	Cash	Cash or margin loan (drawing against the portfolio’s value for more buying power)
Short selling allowed	No	Yes
Free riding allowed	No	Yes
Limitations to investment opportunities	1-2-day settlement period	No

How to Open a Cash Account

Opening a cash account is one of the easiest processes in the investing world.

1. Research stock brokers – Taking the time to research your options and compare platforms is crucial. You want to consider fee structures, features, limitations, past performance, and customer service. Look for reviews from actual customers, and check the broker’s status in FINRA.
2. Open a brokerage account – Sign up for an account with your chosen firm. Make sure you create a system to track your progress and keep tabs on your investments.
3. Deposit funds into your account – Depositing funds requires a wire transfer or bank transfer from a valid account. As soon as the funds clear, you can start trading.
4. Start trading with your cash account – Once your funds appear as active, you can purchase securities. Make sure you maintain enough funds in your cash account to cover trades.

3 Best Cash Accounts

With so many online brokers available, it’s not easy to choose the right one. To help you get started, these are the top three cash accounts available.

Webull

Webull is a popular platform offering cash accounts with commission-free stock, options and cryptocurrency trading. The platform doesn’t have account minimums and gives its users access to a range of educational resources, including real-time market data and customizable investing options.

Users can only trade with settled funds but have access to a range of options, including stocks, ETFs, and crypto.

Robinhood

Robinhood is an online brokerage firm that allows you to trade stocks and other securities without paying commission fees. The platform provides customers with an opportunity to diversify their portfolios with limited capital.

Traders who want to explore margin accounts can also use Robinhood.

Public

Public offers zero-commission trades with direct market access to stocks, ETFs, options, and crypto. Use automated portfolios to craft custom investment plans that are tailored to your goals and risk profile.

Is a Cash Account a Good Idea?

A cash account is a straightforward, low-risk investment in the stock market. You won’t have the same potential as larger margin accounts, but you can expect less risk and fewer fees.

Beginners and conservative investors like these accounts because of the stability, and it can be part of larger investment strategies to round out retirement accounts.

However, there are some limitations to consider, such as an inability to trade on margin. Weigh the pros and cons listed above to make an informed decision before choosing a cash account.

Cash Account FAQs