An Introduction to Cash Accounts at a Stock Brokerage - dummies

An Introduction to Cash Accounts at a Stock Brokerage

By Paul Mladjenovic

If you use a cash account (also referred to as a Type 1 account) for your stock investments, you must deposit a sum of money along with the new account application to begin trading.

The amount of your initial deposit varies from broker to broker. Some brokers have a minimum of $10,000; others let you open an account for as little as $500. Once in a while you may see a broker offering cash accounts with no minimum deposit, usually as part of a promotion. Qualifying for a cash account is usually easy, as long as you have cash and a pulse.

With a cash account, your money has to be deposited in the account before the closing (or settlement) date for any trade you make. The closing occurs three business days after the date you make the trade (the date of execution). You may be required to have the money in the account even before the date of execution.

In other words, if you call your broker on Monday, October 10, and order 50 shares of CashLess Corp. at $20 per share, then on Thursday, October 13, you better have $1,000 in cash sitting in your account (plus commission). Otherwise, the purchase doesn’t go through.

In addition, ask the broker how long it takes deposited cash (such as a check) to be available for investing. Some brokers put a hold on checks for up to ten business days (or longer), regardless of how soon that check clears your account.

See whether your broker will pay you interest on the uninvested cash in your brokerage account. Some brokers offer a service in which uninvested money earns money market rates, and you can even choose between a regular money market account and a tax-free municipal money market account.