When opening a brokerage account, you can choose three types—a cash account, margin account, or options account. You may find a cash account beneficial for your investing needs because you can use it to buy stocks, bonds, or even mutual funds and these securities are owned by you and held in your name.
What are cash accounts?
Cash accounts require that all stock purchases be paid in full, on or before the settlement date. The settlement period is the time between the trade date (the date when the transaction occurs) and the settlement date (the date when the payment is made and the transfer of the securities’ ownership occurs).
Cash account restrictions to keep in mind
The settlement on a stock is the trade date, plus two business days.
However, keep in mind that banking holidays, like Columbus Day and Veterans Day, are non-settlement days where the securities markets are open. While you can trade on these days, they are not included in the settlement period. So, it is important for cash account holders to be mindful of good-faith violations, which can occur when you buy a security and sell it before the settlement date.
In cash accounts, selling stock short and selling uncovered options are not permitted. However, cash accounts are permitted to sell cash-secured puts. Trading options spread strategies on equity options are also not permitted in cash accounts, with the exception of IRAs that have a Complex Options Agreement.
Buying power in cash accounts
The buying power in a cash account is the maximum dollar amount that is available for placing trades. Settled funds, unsettled funds-available, and unsettled funds-unavailable are used to determine a cash account’s buying power.
|Settled funds||Unsettled funds—available||Unsettled funds—unavailable|
A customer purchased 100 shares of XYZ stock on Wednesday, July 10. The total cost of the purchase was $2,574. The same 100 XYZ shares were later sold on Tuesday, July 16. The sale generated proceeds of $2,635. The shares settled on Thursday, July 18 and the account now has $2,653 in buying power.
A customer purchased 100 shares of XYZ stock on Tuesday, July 16. The total cost of the purchase was $1,394. The same 100 XYZ shares were later sold on Tuesday, August 13. The sale generated proceeds of $1,453. These proceeds were immediately made available as buying power because the 100 shares of XYZ stock were settled. These proceeds, while available to trade, are unsettled until Thursday, August 15.
A customer purchased 100 shares of XYZ stock on Monday, April 22. The total cost of the purchase was $3,420. The same 100 XYZ shares were later sold on Tuesday, April 23. The sale generated proceeds of $3,450. These proceeds are not available as buying power until Thursday, April 25, because the shares were sold before the purchase of the shares was settled.
Hypothetical example for illustrative purposes only, does not include commissions or fees.
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