Understanding the basics of your cash account

E*TRADE from Morgan Stanley

 02/28/19

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.

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).

In general, stocks settle T+2, i.e., 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.

In cash accounts, selling stock short and selling uncovered options are not permitted.

What about your buying power?

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

  • Proceeds from the sale of fully paid for securities
  • Immediately available as buying power

Example:

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 funds of $2,635 are immediately available.

Unsettled funds—available

  • Proceeds from the sale of fully paid for settled securities
  • Immediately available for use to enter trades, but closing the position before the funds generated from the closing sale have settled can result in a good-faith violation

Example:

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. The customer then purchases 100 shares of ABC on Tuesday, August 13. These shares must be held until Thursday, August 15, when the sale of XYZ settles. Selling before this day would result in a good-faith violation.

Unsettled funds—unavailable

  • Proceeds from the sale of unsettled securities
  • Not available for trading until the closing trade has settled

Example:

A customer purchased 100 shares of XYZ stock on Monday, April 22, using unsettled funds available. 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, and would be subject to a good-faith violation. 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.

If you think a cash account might be right for you, you’ve come to the right place. Let E*TRADE from Morgan Stanley help you with your trading needs. Open an account to start trading with E*TRADE from Morgan Stanley today.

What to read next...

Stock trading rules in cash accounts: Understanding good faith and freeride violations

There are rules you should be aware of when trading in cash accounts. One rule of cash accounts is when you buy securities, you must fully pay for the securities on or before the settlement date. If you aren’t fully paid by then, you could create good faith or freeride violations.

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