What is a cash account?
Cash accounts require all securities transactions to be completely paid on the settlement date. Cash accounts are a type of brokerage account; available cash must be used to pay them. An investor cannot borrow funds from a broker with a cash account. If they purchase security with their cash account, they must pay it off before selling it.
Cash accounts may also refer to an accounting term called cash books, or ledgers where all cash transactions are recorded.
A common misconception with cash accounts is that they can only hold cash. It’s possible to have cash in cash accounts, but it’s also possible to keep stocks, funds, bonds, cryptocurrencies, or anything related to investments.
To stay up to date with open cash accounts and see detailed line items, companies use cash flow management software. This software helps businesses manage the flow of incoming and outgoing cash funds through these accounts.
Benefits of a cash account
Cash accounts are a relatively safe way of managing investments, but security isn’t their only benefit.
- Potential losses are equal to the amount of money that has been invested. It’s only possible to lose as much as was put in.
- Because of their low risk, cash accounts are good options for beginner or novice investors.
- Cash accounts are directly connected to the account holder’s investment accounts.
- Cash accounts are simple to set up, maintain, and understand.
- Much like a checking account at a bank, cash accounts have access to ATMs and a debit card.
Limitations of a cash account
Though they’re simple to maintain, there are some downsides to consider before opening a cash account.
- There is no margin or line of credit – it’s only possible to use what has been deposited in the account.
- Brokerage accounts can decide to freeze the cash account depending on a number of behaviors, including selling a security or other asset before paying for it with the cash account.
- Some cash accounts come with non-negotiable monthly fees, which may be difficult to maintain depending on the amount invested.
- Lower risk means lower overall yield.
- Low risk does not equal zero risk. Some investments are not insured by the Federal Deposit Insurance Corporation (FDIC), so it is possible to lose the money put into a cash account with no possibility of recovery.
- Cash accounts cannot be used as collateral when applying for a new loan.
Cash account vs. margin account vs. bank account
Similar to a debit card, a cash account is a type of brokerage account that allows investors to run transactions. Each transaction must be paid with available cash. Long positions are also accepted as payment for cash accounts. Banks do not manage this type of account.
A margin account lets investors borrow a specified amount of money against the value of the assets and securities in their account. Margin accounts must have some balance at all times in order to avoid any repercussions. Banks do not manage this type of account. Margin accounts are more like credit cards than debit cards.
A bank account is a general term for an account that can hold money and record transactions between a bank or other financial institution and the customer or business. Types of bank accounts include checking, savings, business, and loans.
Whitney Rudeseal Peet
Whitney Rudeseal Peet is a former freelance writer for G2 and a story- and customer-centered writer, marketer, and strategist. She fully leans into the gig-based world, also working as a voice over artist and book editor. Before going freelance full-time, Whitney worked in content and email marketing for Calendly, Salesforce, and Litmus, among others. When she's not at her desk, you can find her reading a good book, listening to Elton John and Linkin Park, enjoying some craft beer, or planning her next trip to London.
