Having A Cash Account
Some Things You Can and Cannot Do
A Cash Account at an online brokerage firm is a basic online trading account.
Most cash online trading accounts allow you to purchase stocks, ETF's, bonds, mutual funds and CD's. Your purchasing power is equal to the amount of your cash balance available in your account.
With this type of account, no funds are available on loan to purchase additional stocks or investments as in a Margin Account.
A third option available is a Simulated Trading Account.
Once you sell a stock in a cash account, you usually have to wait for the trade to settle, or clear, before you can use the funds again to purchase anything additional. This generally takes 3 business days.
It is important to keep track of when your money becomes available before placing any additional trades. Sometimes with this type of online trading account, you are able to place a buy order for additional stocks before the funds settle from the previous transaction.
This can happen because a broker is allowed, but not required, to accept a trade based on good faith. This is governed by a U.S. federal regulation called Regulation T.
If this happens in your account you must make sure the cash becomes available for the order you placed. If for some reason the cash is not available, the broker is generally allowed to sell any securities you have to cover the cost of the order you placed. This doesn't happen often, but it can happen.
If you will be buying stocks and selling them in the same day, you should make yourself familiar with "Day Trading" rules. A "Day Trade" is when you buy and sell a stock in the same day. Holding the position overnight before selling it is not considered day trading.
With a cash account you can place "day trades", but there are limitations. You cannot place more than 3 "day trades" in any 5 consecutive business days, otherwise you will be considered a "Pattern Day Trader".
The last thing you want to happen is place more than 3 day trades within 5 consecutive days and have your cash account suspended. If this happens, some brokers will allow a one time occurrence to get by, otherwise your account can be restricted from trading for 90 days.
To find out more on "pattern day trader" regulations here is a link to a website with more info: "Margin and Day Trading Requirements"
Once you are considered a "pattern day trader", you are required to open a Margin Account and have a minimum of $25,000 in your account. To read more about a "Margin Account" see my other page here: Margin Account.
One of the other limitations to a "cash account" is that you cannot "short" stocks. Shorting is simply a procedure to produce profits from a decline in a stock price but since you are selling the stock first with the assumption that you will be buying the stock later, you will need to have a margin account which acts like a line of credit.
A cash account is fine for the investor or trader who will not be "scalping" or "day trading" often. Anybody who does "swing trading" or "buy and hold" longer term investing will be fine with this type of account as long as they are not planning on "shorting" any stocks.