When opening a brokerage account you have the option to open different types of accounts depending on what you are looking to do. You can open a joint account, individual account, cash account, margin account and many others but the one we are going to talk about today is the cash account.
There are a couple of advantages and disadvantages for opening a cash account compared to a margin account, especially if you are an active trader. Cash accounts allow you to only use the available cash in your account and the funds must follow Regulation T rules.
This means that when you buy or sell a security they will be considered unsettled funds until two days after the execution when the trade exchange finalizes between clearing firms.
Cash Account Settlement Rules
For stocks, it is the trade date plus two trading days for cash to settle while for options it is only the trade date plus one trading day for the funds to settle. So if you buy an option on Monday and sell it on Tuesday, then those funds won’t clear until Wednesday.
If you buy a stock on Monday and sell on Tuesday, those funds won’t settle until Friday. This is a major drawback for active traders as you have to wait for those funds to settle before using them again.
One major plus side to cash accounts is you can day trade all you want as long as you have settled funds and won’t be held to the pattern day trading rules in a margin account.
There is also no equity requirement to day trade in a cash account, which is a huge bonus for traders who don’t have the extra $25,000 lying around.
Warrior Trading Pro Tip
If you don’t have much experience trading, then it may be a safer bet to start trading in a cash account until you can build up the confidence to trade on margin where you will be exposed to bigger losses and winners.
You won’t have as much buying power as with trading on margin but you will reduce the amount you can lose.
Another option before using your own capital is to paper trade and trade in a simulator where you won’t risk any of your capital.