Brokerage cash is uninvested cash in your investment (brokerage) account. Not all cash may be available to invest or withdraw if you have unsettled trades or margin collateral. You could have brokerage cash in your account if you recently transferred from your bank account received dividends, or sold stock.
You can use brokerage cash to purchase securities, cover margin requirements, or as a reserve for future investments. You can also invest brokerage cash into short-term bond funds to earn some interest without the risk of extreme fluctuations. Likewise, having brokerage cash can mean you'll have funds readily available for investment opportunities.
What is brokerage cash? It is a key element in your investment strategy. Read on to understand possible actions and implications when you have brokerage cash.
Benefits of Brokerage Cash
Brokerage cash can feel like found cash—dividends or stock sales retained in your account over time can surprise you. If you regularly check your brokerage account, you can monitor this cash. You could let it ride and collect some interest, take it out, spend it, or invest it.
Holding some brokerage cash is beneficial for liquidity and new investment opportunities. You'll have the option to buy when prices drop. If you have brokerage cash in your account, you can invest or reinvest for the long term.
If you don't need the cash immediately, consider investing for medium—to long-term growth. For short-term needs, consider bond funds; for longer-term needs, look at stocks, ETFs, mutual funds, and index funds.
Types of Brokerage Accounts
A brokerage account is a type of investment account. However, there are different types of brokerage accounts to choose from. The first type is a cash account. With a cash account, you'll have to pay the full amount for securities purchased. You cannot borrow funds from a broker to pay for investments.
However, you can also consider a margin account. With this brokerage account, the firm may lend you money to buy securities. Then, the securities in your portfolio act as collateral for the loan. Buying securities on margin will incur interest, just like any other loan.
However, margin trading presents additional risk. If you buy on margin and the value of your securities declines, you could be asked to deposit cash or other securities to make up the difference. The brokerage firm could also sell your securities to cover any shortfall without informing you, called a margin call. It can even decide which securities to sell, leading to (potential) additional losses. The brokerage could also change the threshold for a margin call.
How to Open a Brokerage Cash Account
The steps to open a brokerage cash account are simple. You can open a standard brokerage account and a Roth IRA or traditional IRA with a brokerage to invest for retirement.
When choosing your brokerage account, consider account minimums and fees to decide on the best account option for your needs. You can also check the access to mutual funds, global funds, or other investments based on your needs. Finally, check the account feature, including stock guides, educational resources, and a dedicated app.
Here are the steps to open a cash brokerage account:
- Decide which brokerage to work with. There are many to choose from, including Fidelity, Charles Schwab, Webull, Interactive Brokers LLC, Robinhood, Merrill Edge, SoFi Active Investing, Ally Invest, and Vanguard. You can compare online brokers before choosing the best broker for your needs.
- Apply to open an account: You can do this directly on the website. You will be asked for your full name, address, social security number (TIN), and annual income.
- Link a bank account: Once you have a brokerage account open, you'll need to link an existing checking or savings account to start funding the account.
- Make a transfer: You must transfer at least the account minimum to fund your account. If there are no account minimums, you can choose how much you transfer based on your budget and financial plans.
Comparison of Brokerage Cash Services
You'll have access to various services when you open a brokerage account. You could choose to open more than one brokerage account for different services or needs. For example, you might select one account for cash services and another for margin trading. You might also choose multiple accounts within one brokerage firm, such as a standard cash account and an individual retirement account (IRA).
When choosing a brokerage cash service, look at different brokerage firms and their cash services. Be sure to compare fees, interest rates, or returns by investment type, and additional features.
In addition, some brokerage accounts offer brokerage cash services, also called command checks, which function similarly to a traditional check but are processed from your brokerage account.
Accessing Brokerage Cash
Depending on individual brokerage limitations, you should be able to withdraw cash from the account and transfer it back to a linked bank account. If the account has no other limitations, the transfer will take one to three business days.
Cash Management Strategies
Letting cash sit in your account long-term isn't usually considered the best wealth-building strategy because the cash isn't earning any interest. In the long term, compounding interest or increasing investment returns can help you build wealth.
By optimizing cash allocations for investment opportunities, you can be better prepared to take advantage of new investments while earning some returns on your cash reserves. Whether you're trading options, paper trading options, or investing for the long-term, the availability of some cash reserves can help you prepare for new market positions.
If you have cash in your brokerage account, you'll need to access it within the next three to six months, consider sweeping the cash into money market funds, utilizing high-yield cash management accounts, or investing in short-term bond funds.
Some financial experts recommend putting your brokerage cash into ultra-short bond funds, which hold fixed-income securities that mature in less than one year. These funds can offer a higher yield than traditional bond funds with relatively low risk. However, certain ultra-short bond funds may be extra susceptible to losses in high interest rates.
You could also invest in index funds, but these carry greater risk and volatility, so if you need to access the cash short-term, you could face more significant losses. You can also check out the best cash management accounts, or for long-term managed options, consider investing in hedge funds.
Risks and Considerations
Investing can bring significant returns as well as major losses. There is also the potential for loss of value. The impact of market fluctuations on any investment can lead to long-term losses. Selling short, for example, also presents even more significant risks.
Brokerage cash is an uninvested fund, so you won't risk losing its value. However, if you leave the cash uninvested in the long term, you will lose purchasing power over time due to inflation.
As with any other investment, managing risk in your brokerage account through diversification is essential. You can diversify across asset classes and investment types. Possible asset classes for investment include:
- Real estate
- Stocks
- Commodities
- Bonds
- Index funds
- Mutual funds
- Money market funds
- Exchange-traded funds (ETFs)
- Real Estate Investment Trusts (REITs)
- Equities
- Derivatives
- Cryptocurrencies
- Private Equity
- Alternative assets like art, wine, baseball cards, or other collectibles
- Currencies
Depending on your investment horizon, timeline, and risk tolerance, you must distribute your brokerage funds between high, low, and medium-risk investments.
Taxation
Your investments in a standard brokerage account are taxable. Depending on how long you hold an investment, you may need to pay both short-term and long-term capital gains taxes.
If you have capital losses, declaring a capital loss on your tax return can be fully applied against current or future capital gains. You should also carefully check your tax bracket, including understanding day trading taxes and any applicable independent contractor tax rate to understand individual tax implications. If in doubt, speak with a trusted CPA.
Regulatory Oversight
While brokerage firm failures are rare, if you invest your funds in a firm that fails, The Securities Investor Protection Corporation (SIPC) will protect you. The SIPC protects the securities and cash in your brokerage account up to $500,000, including up to $250,000 protection for money in your account. SIPC brokerage firms include nearly all brokerage firms registered with the SEC.
Key Takeaways
Brokerage cash is any cash you hold in a brokerage account in preparation to buy securities. While leaving cash in your brokerage account long-term isn't the best financial strategy, short-term, it can ensure you're ready to act quickly on new investment activities. Your cash (up to $250,000) is protected under SIPC laws if your brokerage fails.
Should you keep brokerage cash long-term? Usually, no. Is some cash useful, for example, for dollar-cost averaging, or do you expect a market downturn? Yes. You can also educate yourself about wealth management, day trading, and becoming a day trader, or stock broker, or check out these stock simulators.
In either case, remember to diversify your portfolio for your individual risk tolerance and investment goals.
Frequently Asked Questions
Can brokerage cash be withdrawn?
Brokerage cash can usually be withdrawn unless you’ve already used it to purchase securities or it is limited.
How does brokerage cash work?
Brokerage cash is simply uninvested dollars in your brokerage account that you can use to purchase securities.
Is brokerage cash FDIC insured?
No, brokerage cash is not FDIC-insured. However, most brokerage firms are SIPC-protected.
About Alison Plaut
Alison Plaut is a personal finance and investing writer with a sustainable MBA, passionate about helping people learn more about sustainable investing and long-term wealth building for financial freedom. She has more than 17 years of writing experience, focused on investments, business, personal finance, and real estate. Her work has been published in The Motley Fool, MoneyLion, and regularly appears on Benzinga.