If you're interested in the stock market, chances are you've heard of brokerages like Wealthfront, SoFi Money and Robinhood. And over the past year or two, more of these firms have begun offering cash management accounts as well as investment accounts.
So what's the difference between the two types of accounts? It lies in whether you’re looking to spend and save or whether you’re looking to invest. Even though cash management and brokerage accounts are both offered by brokerages, their functions are very different.
CMAs — which behave similarly to bank accounts — allow customers to park their money and earn a set interest rate, often with the ability to make purchases with a debit card. Brokerage accounts help customers invest in assets like stocks, bonds and mutual funds, which can earn investment income.
Here's more on the similarities and differences between CMAs and brokerage accounts.
What’s the difference between cash management accounts and brokerage accounts?
Cash management account definition
A cash management account is a cash account that’s offered by nonbank financial service providers and helps customers spend and save their uninvested money. These accounts are often provided by brokerage and investment firms as a way to complement investment accounts.
Brokerage account definition
A brokerage account is an investment account that allows customers to buy various investments, including stocks, bonds and mutual funds. The brokerage firm can help customers pick their assets, and customers can earn money on their investments.
Which type of account is best for me?
If you’re looking to do something productive with your cash, then you have very different options to choose from if you’re considering a brokerage account versus a CMA. The best option for you depends on your financial goals. Here’s what to consider when making your choice.
Think about how you want your cash to work for you. Cash management accounts and brokerage accounts serve different purposes. The earnings from brokerage accounts vary depending on stock market performance, but overall they have the potential to earn much more than CMAs over time. However, there is no guarantee your investments will pay off — there’s always the risk you’ll lose some or all of your cash. A good guideline: Never invest any cash you need back in the next five years, so you can weather inevitable market ups and downs.
CMAs, on the other hand, can be used as a stable place to put and use cash on a daily basis, especially those that offer debit cards that allow customers to make purchases.
Evaluate how you feel about risk. You stand to earn more with an investment account, but you also risk losses. With a CMA, you’ll earn a bit of interest — likely quite a bit less than your investment income — but your savings aren’t at the mercy of the performance of the stock market. A CMA will function more like a traditional checking or savings account.
You can consider getting both kinds of accounts. Since CMAs and brokerage accounts are both offered by brokerage firms, they can often be linked if they’re available from the same provider. With these accounts linked, it can be easy to transfer funds back and forth between investing or spending and saving.