What is a cash account?
A cash account is a brokerage account where you pay for every purchase in full with cash that has actually settled. No borrowing from the broker, no short selling, no leverage. It is the default account type for new investors and required for anyone who wants to avoid margin entirely.
Key features
- Full settlement required: you must own enough settled cash or securities to cover every trade
- T+1 settlement: proceeds from a stock sale settle one business day later under T+1 settlement
- No short selling: you cannot sell a stock you do not own
- No margin interest: no borrowing means no interest cost
- No margin calls: positions cannot be force-liquidated for falling below maintenance
Settlement violations
Cash accounts have three specific violations that margin accounts avoid:
- Good faith violation: buying and selling the same security before the proceeds from the first buy have actually settled. See Good Faith Violation
- Free-riding: buying with cash you don't have yet, then using the proceeds from selling that same position to cover the original purchase
- Cash liquidation: buying a security and then selling a different security after the fact to cover the purchase before the first trade settles
Three violations in a 12-month period typically triggers a 90-day restriction that requires settled cash for every purchase.
Who should use one
- Long-term investors who never short or trade on leverage
- Beginners who want to avoid the complexity and risk of margin
- Anyone under the $25,000 PDT Rule threshold who still wants to trade frequently (a cash account lets you day trade without the PDT restriction, as long as you don't violate settlement rules)