What is Brokerage Cash? How Should You Use It?

So you’ve piled up a bit of cash in your brokerage account. Maybe you bought low and sold high, transferred funds from a bank, or haven’t reinvested your dividends. You’ve got cash—and this a good problem.

Before making plans for that little sum of green—which may be titled brokerage cash in your statements— you have to figure out what is yours to use immediately. Then you can have fun.

This article clearly states what brokerage cash means and how it works. You will also gain better understanding on how to open a brokerage account.

What is Brokerage Cash?

Brokerage cash for some may be categorized as found cash—that surprise stash that piled up as you weren’t watching.

Others might carefully nurture it, monitoring assets from stock sales, dividends, and transfers. You can let it ride and collect a bit of interest, take it out and spend it, or invest it.

Whatever you choose, you have to know what’s yours to spend. And brokerage cash, as it’s labeled in the Robinhood app, isn’t necessarily available to spend at that moment.

That’s because the brokerage cash line is a top-line number, meaning you have to strip out some things like funds from unsettled trades and collateral before arriving at a sum that you can spend.

Brokerage cash is a tricky number; it’s not the same as money in your wallet.

Keep looking in your account and you’ll find the true bottom line, the amount you can spend immediately. Robinhood calls it “buying power” or “the amount of money you can use to purchase stocks, options, or cryptocurrencies.”  

TD Ameritrade calls it “cash available for withdrawal.” Different firms, different terms, but same meaning.

Investors can leave the money where it is, and it will earn a tiny rate of interest similar to that of a bank savings account.

Types of Brokerage Account

Investors looking to purchase securities can do so using a brokerage account. The two main types of brokerage accounts are cash accounts and margin accounts.

The main difference between these two types of accounts are their respective monetary requirements.

Cash Account

In a cash account, all transactions must be done with available cash or long holdings. When buying shares in a cash account, the investor must deposit funds to settle the trade—or sell an existing position on the same trading day—so cash proceeds are available to settle the buy order. These accounts are quite basic.

If you grant the brokerage firm permission, shares stored in a cash account can also be lent out to other interested parties, including short sellers and hedge funds. This can be a source of further gain for an investment. This method is termed share lending, or securities lending.

If you have a cash account with assets that are in demand for short sellers and hedge funds, you can let your broker know that you are willing to lend out your shares.

If there is a demand for these shares, your broker will supply you with a price on what they would be willing to pay you for the ability to lend these shares.

If you accept, your broker will lend your shares out to a short seller or hedge fund for a higher rate. For example, your broker may give you an 8 percent interest on the loaned shares, while lending out at 13 percent.

How Does it Work?

Depending on the size of your position, it can be a wonderful additional source of return. This approach also allows you to keep your existing long position in the security and benefit from its upward movement.

There might be a lot of demand by short sellers and hedge funds to borrow assets, especially on securities that are generally hard to borrow. When borrowing funds or securities, the borrower is expected to pay fees and interest on the amount borrowed.

Depending on market rates and the demand for the assets, the exact amount of interest charged for borrowing securities will vary.

The most attractive assets to lend are ones that are the toughest to borrow for short selling (which usually means companies with a tiny market capitalization or rarely traded stocks) (which usually means companies with a small market capitalization or thinly traded stocks).

Shares that are already heavily shorted or have decreased in price may potentially be desirable for lending.

Margin Account

A margin account allows an investor to borrow against the value of the assets in the account in order to purchase new positions or sell short. Investors can utilize margin to leverage their positions and profit from both bullish and bearish fluctuations in the market.

Margin can also be used to make cash withdrawals against the value of the account in the form of a short-term loan.

For investors wishing to leverage their positions, a margin account can be very useful and cost-effective.

When a margin balance (debt) is formed, the outstanding balance is subject to a daily interest rate paid by the firm.

These rates are based on the current prime rate plus an additional fee that is charged by the loan firm. This rate can be pretty high.

For example, an investor with a margin account may take a short position in XYZ stock if they believes the price is likely to fall.

If the price does really decline, they can cover their short position at that time by acquiring a long position in XYZ stock.

Thus, they gain a profit on the difference between the amount received at the first short sale transaction and the amount they spent to buy the shares at the lower price (minus their margin interest costs over that period of time) (less their margin interest charges over that period of time).

How Does it Work?

In a cash account, the same investor in this scenario must find different techniques to hedge or earn income on their account (as they must use cash deposits for long positions only) (since they must use cash deposits for long positions only).

For example, they may put a stop order to sell XYZ stock if it drops below a specified price, which reduces their downside risk.

Margin accounts must maintain a certain margin ratio at all times. If the account value falls below this limit, the client is issued a margin call.

A margin call is a demand for a deposit of more cash or securities to put the account value back within the limitations. The client can deposit additional cash to their account or sell some of their holdings to raise the cash.

How to Open a Brokerage Account?

You can open a new brokerage account in a matter of minutes, provided you have the funds to make the initial deposit. Just be prepared to answer some questions and provide some personal information during account setup.

You will need to provide personal information to open a brokerage account, such as:

  • A Social Security number or a Tax Identification Number
  • A driver’s license or passport, or other government-issued ID
  • Information on your employment status
  • Financial information, such as your annual income and net worth
  • A basic overview of your investment objectives

Unsure of how to choose a brokerage account? Here are two tips:

Compare Account Offers

For online brokers and robo-advisors, pay attention to fees, fund selection and how user-friendly you find their website.

Do you meet the minimum account requirements? Is there access to human help if you need it? Check out at least three different brokerages and read online reviews.

Ask Friends And Colleagues

If you’re looking for a managed account or financial advisor, ask people you know if they’ve worked with someone they would recommend.

Meet with brokers or advisors in person to see how you mesh. “It’s important to meet with different advisors and really understand their philosophy and how they work as a team,” Weber says.

“Are they a team, or is it just an individual person? Who’s selecting the investments? Do they offer you financial planning?”

How to Use a Brokerage Cash/Account?

Now that you know what’s yours, the time is here to figure out what to with it.

What you do of course depends on factors like how much you have in that bottom-line account as well as your immediate needs—like bills or vacations—and long-term requirements or time horizon.

Since everyone’s needs are different, the following are some rough guidelines for what to do with your brokerage cash.

Buy More Stocks, Bonds, ETFs 

If your appetite for risk means that you can afford short-term dips in pursuit of long-term gains, then keep investing for growth.

Also, if you make a gain on a stock sale, then put it back into the market. If you’re getting dividends, opt to have them reinvested, and they won’t pile up in your brokerage account.

Put the Cash in a Short-Term Debt Instrument

Do you think you’ll need the money soon? But not immediately? Some financial experts recommend putting your brokerage cash into a so-called ultra-short bond fund.

Ultra-short funds hold fixed-income securities that mature in less than one year, and they typically pursue higher yields by investing in riskier securities than traditional bond funds.

In high interest rate environments, ultra-short bond funds of certain types may be extra susceptible to losses.

Leave It Alone

You can let it sit. Yes, keep your powder dry. It will be there when you need it. In most cases, it’ll be swept into an FDIC-insured account.

Still, the problem is you’ll earn interest equivalent to that of a bank savings account. Pretty crummy. But it’ll be there.

Spend It

Most brokerages will let you pay bills with your brokerage cash. Charles Schwab, TD Ameritrade, Interactive Brokers, and many others permit this, and you just need to set up a payment account.

Or spend it on your vacation, or get some nice shoes. Go ahead. It’s your money.

Conclusion

A brokerage account is a key part of your financial plan, as investing in markets is one of the best ways to achieve long-term growth.

It’s important that you work with a company or person you can trust, because it’s your money and you are investing in your future.

Brokerage cash can be seen as found money—it might slowly accumulate over the years through dividends and stock sales. It can be reinvested or left alone to wait for the next investing opportunity.

Another option is to set up a cash management account and pay bills with the cash. Or have some fun and go on vacation!

FAQs

Can you spend brokerage cash?

Spend It. Most brokerages will let you pay bills with your brokerage cash. Charles Schwab, TD Ameritrade, Interactive Brokers, and many others permit this, and you just need to set up a payment account. Or spend it on your vacation, or get some nice shoes.

What do I do with cash in my brokerage account?

Keep your deposit in cash at your broker. Savers can stash their cash in a brokerage and rack up interest in a money market fund, though it may be minimal these days. Typically brokerages sweep any excess cash into a basic money market account, allowing you to collect some extra coin.

When can I withdraw my brokerage cash?

Current securities rules give brokers two business days to finish the settlement process, so that’s when your money will be available for withdrawal. One thing to note is that if you have a margin account, then your broker might let you take cash out before your trades settle.

Where did my brokerage cash go?

Your Brokerage Cash Probably Earns Only. … Over the past few years, most brokerage firms quietly eliminated the option of sweeping uninvested cash into a money market fund. Instead, nearly all brokers now sweep cash into an affiliated bank account. The good news is that bank accounts are FDIC insured.

Why is my brokerage cash negative?

If your cash balance is negative (in parenthesis), then that means your account is on margin and borrowing money. Accounts on margin are assessed interest daily (including weekends) and are charged monthly (mid-month).

References

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