Trading Terminology: The Cash Account
When opening a brokerage account participants have the option of different types of accounts depending on what they look to do.
Some of the kinds of accounts are: a joint account, individual account, cash account, and margin account.
This is about The Cash Account.
This is an account that allows the holder to use only the cash available to purchase financial securities like stocks, options, ETFs, mutual funds and fixed income products.
The Key advantages and disadvantages for opening a cash account compared to a margin account, especially if you are an active trader.
Cash accounts allow only use the available cash in the 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 three days after the execution when the trade exchange finalizes between clearing firms.
For stocks, it is the trade date plus 3 trading days for cash to settle while for options it is only the trade date plus 1 trading day for the funds to settle.
So, buy an option on Monday and sell it Tuesday, then those funds clear on Wednesday.
Buy a stock Monday and sell Tuesday, those funds clear Friday.
This can be a drawback for active traders as you have to wait for the money to settle before using it again.
One major plus side to cash accounts is one can day trade all one want as long as you have settled funds and will not be held to the PDT (pattern day trader) rules in a margin account. There is also no equity requirement to day trade in a cash account, which is a bonus for traders who do not have an extra $25,000 to pledge.
Caution: If you do not have much experience trading, then it is safer bet to start trading in a cash account until confidence is buildt up to trade on margin where the exposure is bigger losses. If new to trading, then before using real money paper trade and trade in a simulator where the risk is NIL.
Remember, it is your money and your responcibility