Cash Account

A cash account is a brokerage account in which you can only buy securities using money you actually have deposited and settled in the account. There is no borrowing involved: if you want to buy $2,000 worth of stock, you need $2,000 of settled cash sitting in the account before or at the time of the trade. This makes it different from a margin account, where the broker lends you money or shares so you can trade with more buying power than your own cash.

The mechanic that trips people up is settlement. When you sell a stock, the cash from that sale is not usable right away in a cash account — it typically takes a period of time (historically a couple of business days) for the trade to "settle" before that cash is officially yours to redeploy. If you buy a new stock using proceeds from a sale that hasn't settled yet, and then sell that new position before the original sale settles, you can trigger what's called a "good faith violation" or, in more serious repeated cases, get flagged for freeriding. Brokers restrict accounts that do this too often.

This settlement rule is why active or frequent traders often find cash accounts frustrating for fast-paced, same-day strategies: your buying power can be temporarily locked up even though you technically "have the money," simply because a prior sale hasn't finished settling. Margin accounts sidestep some of this because borrowed buying power isn't tied to settlement in the same way — but margin introduces its own risks, like leverage and margin calls.

The exact number of days required for settlement, and the specific thresholds and consequences for good faith violations, are set by regulators and clearing rules and have changed over time, so they shouldn't be assumed from memory.