Brokerage cash is the liquid, uninvested money held in an investor’s brokerage accounts. It’s basically the same as a bank’s checking or savings account, but it’s held by a brokerage firm instead.
The cash can originate from several sources, including deposits, the sale of securities or dividends and interest payments.
Holding cash in a brokerage account provides buying power, giving you the immediate ability to purchase stocks, bonds or other investment products. Beyond trading, investors can use their brokerage cash for other purposes, such as transferring it to an external bank account, earning interest or using it as collateral for a margin loan.
Understanding brokerage cash is fundamental for any investor managing a diversified portfolio. Here’s what you need to know
How Brokerage Cash Works
Brokerage cash is uninvested money in your brokerage account that gives you the means to buy securities like stocks, bonds, mutual funds and exchange-traded funds (ETFs) among others.
When you deposit money into your brokerage account, sell an investment or receive a dividend payment, that money is held as cash until you withdraw or invest it. If you deposit $5,000, it’s considered brokerage cash you can use to make trades.
Brokerage Cash vs. Other Funds
It’s important to distinguish brokerage cash from other types of funds that may appear in your account:
- Unsettled funds: When you sell a security, the proceeds aren’t immediately available as cash. The money is “unsettled” for a period, typically two business days, as the transaction is finalized and the funds are transferred. Unsettled funds cannot be withdrawn or used to buy new securities, but once they clear, they’ll become part of your brokerage cash balance.
- Margin: Margin is not your cash. It’s money you’ve borrowed from your brokerage to buy securities. The loan is backed by the assets in your account, which act as collateral. Margin allows you to invest more than your cash balance, but it comes with interest charges and the risk of a margin call.
- Bank cash balances: While both cash balances are liquid, brokerage cash is held at a brokerage firm and is specifically for investing, whereas a bank cash balance in a checking or savings account is for day-to-day transactions and general savings. Brokerage cash is protected by the Securities Investor Protection Corp. (SIPC), which covers up to $500,000 in securities and cash, including a $250,000 limit for cash, in the event of a brokerage’s failure. Bank cash is protected by the Federal Deposit Insurance Corp. (FDIC) up to $250,000 per depositor, per institution.
Uses of Brokerage Cash
- Buying power: The most common use is to purchase stocks, bonds, mutual funds, ETFs and other investments.
- Cash management: Many brokerages offer cash sweep programs, which automatically move your uninvested cash into an interest-bearing account, such as a money market fund or a bank deposit account.
- Transfers: You can easily transfer brokerage cash into an external bank account. This allows you to move profits or dividends into a personal checking or savings account.
Pros and Cons for Investors
Brokerage cash is liquid and has multiple uses.
Imagine you sell $10,000 worth of stock in your brokerage account. The money will show up as unsettled funds for two business days. Once settled, it becomes part of your brokerage cash balance. The cash is now part of your buying power. You can use it to purchase a different stock or other security, or you could let it sit in the account.
If your brokerage has a sweep program, that cash will automatically be moved into a money market fund, where it will start earning interest. But if you decide the market isn’t right and want to move the money to your bank, you can initiate a transfer.
Pros
- Liquidity and flexibility: Brokerage cash provides immediate access to funds, allowing you to quickly capitalize on investment opportunities without waiting for transfers.
- Safety: Your cash is protected by SIPC insurance, providing a layer of security against the failure of the brokerage firm.
- Potential to earn interest: With cash sweep programs, your idle cash can earn a yield, turning a passive holding into a productive asset.
Cons
- Low return: The interest earned on brokerage cash, even with sweep programs, is often lower than what you can earn in a high-yield savings account or other fixed-income investments. This can lead to an opportunity cost if you leave large sums of money uninvested for long periods.
- Risk of inflation: Cash sitting in a brokerage account loses purchasing power over time because of inflation. The risk is greater the longer the money remains uninvested.
Applying Brokerage Cash to Your Financial Strategy
Brokerage cash is a liquid asset in an investment account that provides buying power to execute trades. It originates from deposits, asset sales and dividends.
It’s distinct from unsettled funds, margins and bank balances. It offers the liquidity needed to act quickly on market opportunities, but it also presents an opportunity cost if left idle because it may earn a lower return than other investments and its purchasing power can be eroded by inflation.
Smart investors use brokerage cash strategically, holding just enough for immediate trading needs while sweeping larger, uninvested amounts into interest-bearing vehicles to mitigate the drag of inflation and maximize returns.
Frequently Asked Questions
Is my brokerage cash protected by the FDIC?
No, instead your brokerage cash is protected by SIPC up to $500,000 for securities and cash, with a separate limit of $250,000 for cash.
How is brokerage cash different from my bank account balance?
Brokerage cash is specifically held for investment purposes and is insured by SIPC, while your bank account balance is for daily transactions and savings and is insured by the FDIC.
What is a cash sweep program?
A cash sweep program is an automatic service offered by brokerages that moves uninvested cash from your account into an interest-bearing account, like a money market fund, so it can earn a return while it’s not being used to buy investments.
