Cash account
Also known as: cash brokerage account
A cash account is a brokerage account in which the customer must pay in full for every purchase, with no borrowing from the firm. It is the default account type and the opposite of a margin account.
In a cash account, an investor deposits money and pays the full purchase price of every security bought. The broker-dealer extends no credit, so the customer cannot leverage a position, and securities held in the account are fully owned rather than pledged as collateral. Any investor can open a cash account, and certain accounts — such as retirement accounts and most custodial accounts — are generally required to be cash accounts.
Payment is governed by Regulation T, which requires customers to pay for purchases promptly after the trade settles. If a customer fails to pay, the firm sells out the position and the account can be frozen for a period, during which the customer must have cash on deposit before any new order is accepted. Because no credit is involved, a cash account carries no margin interest, no maintenance requirement, and no risk of a margin call.
The trade-off is strategy. Uncovered (naked) option writing and short selling require credit and collateral, so they cannot be done in a cash account; covered calls and long options are permitted. An investor in a cash account can lose no more than the amount invested, which makes it the appropriate choice for conservative and fiduciary accounts.
Separately, in bookkeeping and financial reporting, the cash account is the general ledger account that records cash receipts and payments, and its balance feeds the statement of cash flows. The Series 65 tests the brokerage meaning alongside margin accounts, while the CMA Part 1 and ACCA Financial Accounting exams test the accounting meaning through cash recording, payables, and cash flow statements.
Key takeaways
- A cash account requires full payment for every purchase; the broker-dealer extends no credit.
- Regulation T governs the payment deadline, and failure to pay can result in a sell-out and a frozen account.
- Short selling and uncovered option writing are not permitted in a cash account.
- Retirement and most custodial accounts are generally required to be cash accounts.
- In accounting, the cash account is the ledger account tracking cash receipts and disbursements.