What is a Cash Account?
When you want to buy or sell shares of stock and other securities, you normally have to do so through a brokerage firm. A cash account is the basic type of brokerage account for this purpose. There's nothing mysterious or complicated about a cash account, but it helps to know how they work and what alternative kinds of accounts and options are available for the investor.
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Identification
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A cash account (also called a cash management account) is the simplest form of brokerage account. You deposit cash which is then used to buy securities. The proceeds of sales are deposited in the account. In the event a transaction requires more funds than you have in the account you have to "settle" the transaction (deposit more funds) by a specified date (usually within 3 days). You can use a cash account to buy and sell stocks, bonds, mutual funds, and certain other securities. You cannot buy stocks on margin or sell stocks short. This type of trade requires that the broker extend credit, which is not allowed in a cash account.
Types
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There are two other major types of brokerage accounts. A discretionary account allows a broker to make transactions on your behalf without prior approval (this is a common type of account for people who enroll in investment programs run by the brokerage firm, rather than taking the time to select their own stocks and other securities). Margin accounts allow you to borrow money from the broker for short selling stocks, commodities trading, and other leveraged transactions. Investors seeking to open a margin account have to meet stricter requirements than for a cash account.
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Requirements
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The rules for opening a cash account are simple. As with a checking or savings account at your bank, you have to show a government-issued ID such as a driver's license or military ID. Brokers need some additional information. Usually you need to disclose your yearly income and net worth. You must provide the name of your employer, and if you work for a company dealing with securities you have to have permission from your employer to open the account (this is to prevent conflicts of interest and insider trading). Most brokers require a $1000 minimum initial deposit to open a cash account.
Options
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You can open a cash account through your bank. This is a popular choice since it's convenient, fees are moderate, and you can discuss your investments with your bank manager. The full service brokerage account is another option. Full-service brokerage firms provide extensive research on securities, investment tools, and investment counseling. They are more expensive, but are a good choice if you don't have the time or knowledge to research individual stocks and other securities. If you do have the background to do your own research, a discount broker is the best choice. The discount brokerage provides few services other than executing your transactions but their fees are much lower.
Features
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Cash accounts can be part of an Individual Retirement Account (a margin account isn't allowed under IRA regulations). You can open a cash account (again, not a margin account) for a minor to start them on investing. Cash accounts can include mutual funds as well. Alternatively, you can open an account directly with a mutual fund, but can't carry out other trades. The exact terms and conditions applying to a cash account vary, so read them carefully and ask the broker about anything you aren't sure about.
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