Feb. 24, 2011
A cash account is a type of brokerage account in which the investor must pay the full amount for securities purchased. An investor using a cash account is not allowed to borrow funds from his or her broker-dealer in order to pay for transactions in the account (trading on margin).
The credit extension provisions of the Federal Reserve Board’s Regulation T govern an investor’s use of a cash account to purchase securities. In a cash account, an investor must pay for the purchase of a security before selling it. If an investor buys and sells a security before paying for it, the investor is “freeriding”, which is not permitted under Regulation T and may require the investor’s broker to “freeze” the investor’s cash account for 90 days. During this 90-day period, an investor may still purchase securities with the cash account, but the investor must fully pay for any purchase on the date of the trade. For more information on cash accounts and their related rules, please read the SEC staff’s investor bulletin “Trading in Cash Accounts – Beware of the 90-Day Freeze under Regulation T”.