Basics of a Cash Account

by Investing School on September 29, 2010

A cash account is a special kind of brokerage account that mandates that the client make full payment for a transaction before a certain date. The customer of a cash account does not get to buy on margin, or use borrowed money to buy securities – only cash is acceptable. These cash only investments are commonly seen as special trusts for children who are still minors, or as retirement accounts.

The rules for administering a cash account are laid out by a set of rules that are called “Regulation T.” The Regulation T is involved with setting the percentages of deposits that must be present (or found in a margin account) in order for certain types of transactions to proceed. For example, this could involve an investor buying on margin, or a broker obtaining loans for funds in a brokerage account. Notably, Regulation T prohibits both of these actions when dealing with a cash account.

Cash accounts are often considered a terrific option for creating a reliable account for retirement living. In fact, one of the most pertinent examples of a cash account dedicated to retirement purposes is known as an Individual Retirement Account, or IRA. IRAs are totally funded with cash deposits that are further invested by the broker. In most cases, the investments the broker selects with IRA funds are quite low risk and designed for a long period of investment. This helps to guarantee a smaller, but very consistent, level of growth that is ideal for funding retirement.

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