What is a Cash Account? Definition, Rules, and Example
A cash account is a brokerage account in which all securities must be paid for in full with settled cash, with no borrowing against margin permitted.
What is a Cash Account?
A cash account is a brokerage account where every purchase must be funded with cash that has fully settled in the account. No borrowing from the broker is allowed, so there is no leverage, no margin loan, and no margin call. Cash accounts are governed by Federal Reserve Regulation T and FINRA cash-account rules, which prohibit freeriding, defined as buying a security and selling it before paying for the purchase. Because settlement in U.S. equities is now T+1, cash from a sale becomes available for new purchases one business day after the trade.
How the Rules Work
Three mechanics define a cash account:
1. Full payment. Buying power equals settled cash only. If you have $10,000 settled, you can buy $10,000 of stock, no more.
2. Settlement timing. Under T+1, proceeds from a Monday sale settle Tuesday. Using unsettled proceeds and then selling the new position before the original sale settles creates a good faith violation.
3. Violation penalties. Three good faith violations in 12 months restrict the account to settled-cash-only trading for 90 days. Freeriding, selling a security bought with proceeds of a sale of that same security before paying, triggers an immediate 90-day freeze under Regulation T.
Notably, the pattern day trader rule applies to margin accounts, not cash accounts. A cash account can day trade without the $25,000 minimum, but each round trip consumes settled cash until T+1 recycles it.
Worked Example
A trader holds $20,000 settled cash. On Monday, they buy 100 shares of AMD at $150, committing $15,000, and sell the position Monday afternoon at $153 for $15,300 proceeds. That $15,300 is unsettled until Tuesday. If the trader buys $15,300 of another stock Monday evening and sells it the same day, the purchase was made with unsettled funds and the sale occurred before the AMD proceeds settled: one good faith violation. Two more within 12 months and the account is restricted. If instead the trader waits until Tuesday, the full $20,300 is settled and fully reusable.
When Traders Use It
Cash accounts suit three profiles. First, traders under the $25,000 pattern day trader threshold who want to day trade legally without margin. Second, options traders running defined-risk strategies like long calls, debit spreads, and cash-secured puts, which brokers permit in cash accounts. Third, investors who want a hard structural guardrail against leverage. To test strategies under realistic settled-cash constraints, run them in the paper trading simulator.
Limitations and Common Misconceptions
The biggest misconception is that cash accounts are slower versions of margin accounts. The constraint is structural: capital velocity is capped by T+1 settlement, so an active trader with $20,000 in cash can deploy roughly $20,000 per day, while a margin trader can turn the same capital several times. Cash accounts also cannot short sell, since shorting requires borrowing shares through margin. Another misconception is that options are unavailable; defined-risk option strategies are fully permitted, while naked options are not. Finally, some traders assume violations are waived on first offense; brokers report and enforce them mechanically under Regulation T.