A cash account is a B2B or B2C account based on instant payment, meaning no credit is available. A cash account (AKA cash book) helps record a transaction involving cash, particularly cash payments and receipts. Thanks to the twofold significance of cash accounts on accounting, it is considered a unique daybook. In accounting, this type of account serves as a ledger and main entry book. Because it has two entities (Credit and Debit), the Cash book has a dual influence.
If you have a cash account with a broker, each transaction in cash trading must be
paid for with the money in the account at the settlement time. It is purchasing or
selling shares without using a margin by supplying the capital required to complete
transactions. Hence, margin purchasing and short selling are not allowed in cash
accounts.
In short, cash accounts are those in which clients deposit
money to purchase assets through a brokerage firm.
Online brokerage firms usually provide clients with either a cash account or a margin account to purchase and sell certain assets.
What to be Careful of when Trading with a Cash Account
If you are someone who trades frequently, we recommend that you be attentive not to break any rules governing your cash account. You must, for example, ensure that you have enough money in your account to make transactions, and you should not pay for a security purchase by selling another security after the date of purchase.
Imagine someone with no cash in their account decides to buy $50,000 worth of shares on Wednesday. To cover the costs, they sell $50,000 worth of other stocks on Thursday. And since the transaction will close two days later, this would be a violation. The sufficient funds in the account to cover the transaction would not be available, which is considered a cash liquidation violation.
If you are an investor with 0 or close-to-zero funds in your cash account, you should not pay for securities purchases by selling the same securities. Investors, for example, may buy $5,000 worth of shares on Tuesday but cannot pay within 2 days. Those investors might sell the same shares on Friday, one day later than the settlement date of the acquisition, to pay for the transaction. A freeriding violation is what this is called.
Active investors with cash accounts and no money on hand should not acquire securities and sell them unless the cash becomes available from a previous sale that was recently settled, which is considered a good faith violation.
Best for
If you are a beginner investor, chances are you will be satisfied with a cash account. There's little to no need to open a margin account if you are a new investor. While margin accounts can provide beneficial flexibility, margin trading is not risk-free and should only be done by experienced traders.
