What Is Cash Credit in a Brokerage Account?
Cash credit is a new cash deposit or proceeds from a stock sale credited to your account. In order to understand cash credit, one must review how a brokerage account works.
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How a Brokerage Account Works
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A brokerage account is used to buy, hold and sell securities such as stocks, bonds or mutual funds. When an investor buys a stock, he has three business days to pay for it -- to settle the trade. If he deposits the cash to pay for the trade before it settles, the cash stays in the account and is shown as cash credit. When the trade settles, the cash is exchanged for the stock. When an investor sells a stock, the same three day settlement rule applies: the stock will be taken out of his account and the cash proceeds credited to it on the third business day.
Money Market Sweep Shares
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Idle, or un-invested, cash balances between trades or investments can be significant. Brokerage firms came up with a way for investors to earn interest on them. When an investor opens a brokerage account, he selects a "sweep" money market account into which all un-invested cash is automatically deposited -- swept -- and from which it is taken to pay for trades.
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How Cash Moves through Account
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When an investor sells a stock, the cash proceeds are credited to his account on the third business day and are shown as a cash credit. The money is then automatically swept into the money market fund of his choice -- the investor does not have to do anything about it. The cash stays un-invested only until it is swept into the money market fund, typically just one business day. So the cash credit entry in a brokerage account is temporary and only appears between trades.
Active Trading
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An active trader who buys and sells multiple stocks on a regular basis is bound to have un-invested cash credit balances in his account for all the various trade settlements. The broker software is set up to make all the necessary calculations and net balance transfers automatically so the trader does not have to worry about or second guess the accounting, even though the balance between open and closed positions and money market sweep shares and cash credit may look confusing.
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