Brokerage Cash: What It Is & Strategies to Consider
Uninvested cash in your brokerage account may not all be available to invest, but there are ways to put it to work.
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If you use a brokerage account to place trades or otherwise invest, the amount of uninvested money in your account is generally referred to as “brokerage cash."
Brokerage cash is a top-line number, meaning it does not factor in things like unsettled trades or cash that's required as margin collateral. As a result, it shouldn't be considered available cash — it's possible not all of the cash can be invested or withdrawn for use.
Cash can accumulate in a brokerage account for a variety of reasons — maybe you just transferred funds from your bank account, received a dividend or interest payment or you decided to sell some stock and the proceeds settled in your account as cash.
Other terms you might hear for brokerage cash include “uninvested cash” or “cash available to invest.”
Brokerage cash vs. buying or purchasing power
If you see a large sum of brokerage cash in your account, be aware that this amount may not all be available for reinvestment or withdrawal. As mentioned above, brokerage cash reflects the total amount of cash in the account before subtracting things like unsettled trades or collateral for a margin loan.
Side note
On the other hand, what's commonly referred to as "purchasing power" (or sometimes "buying power") does take such obligations into account and is the true reflection of the cash you have access to at that moment.
For example, say you own a brokerage account with $10,000 invested in various stocks and you don’t have any margin loans. If you had zero cash in the brokerage account and you decided to sell $2,000 worth of stock, your brokerage cash would increase from $0 to $2,000 on the day you placed a trade (assuming no additional trading costs or commission). Most stock trades now settle one business day after the trade is placed . So, even though your brokerage cash increase is reflected immediately, your purchasing power would remain at $0 until the trade has settled the next business day.
Does brokerage cash earn interest?
Sometimes. When you open a brokerage account, some firms will allow you to select a cash sweep program. The broker will then automatically take uninvested cash received from deposits, dividends or interest payments and “sweep” that money into an affiliated bank account or a low-risk investment, such as a money market fund.
If your broker doesn't offer this, your brokerage cash will likely earn a rate that's much lower than what you might see in a traditional bank savings account. In fact, it is not uncommon for cash in a brokerage account to earn 0.01% APY — meaning that $10,000 in brokerage cash would earn approximately $1 per year.
Given that interest rates remain quite high, it's worth shopping around or asking your broker how you can earn a higher rate on your uninvested cash. If you intend to keep a lot of cash in your brokerage account, it may be worth switching brokers and opting for one that offers high cash sweep rates.
How to use your brokerage cash
If you're looking for ways to get more out of your brokerage cash, some options include:
Opting into the highest cash sweep option. As mentioned above, some brokers offer several, but they don't always opt you into the highest rate. Check your options if you're not sure.
Invest or reinvest for the long term. If you don’t need to access your cash immediately, and you’d like to target some longer-term growth, you could invest your brokerage cash in different stocks, bonds or ETFs.
Buy shorter-term bonds or CDs. Fixed-income securities offer more safety in the short term, as they are typically less volatile than the stock market. While they may offer better interest rates than a cash sweep program, you’re effectively “locking up” those funds for the duration of the bond or CD, and accessing your cash prior to maturity may result in losing money on your investment.
Consider cash management accounts. Cash management accounts, which are often offered by brokers, will often have FDIC insurance. Some are currently paying up to 4%.
Pay bills. Some brokerage firms allow you to pay bills directly from your brokerage account using your available cash.
Move it back to your bank account. Once your cash has settled, you can transfer it back to your bank account to address other needs you may have. If you're after a high interest rate, be sure to choose a bank account with a high APY.
Leave it alone. If there’s a chance you’ll need to access the cash and you don’t want to take on additional risk, you can leave it as brokerage cash. Some investors like to keep a portion of their portfolio in cash as “dry powder” — meaning they are waiting for a dip in the market to buy securities at lower prices.
When you look for options with more growth potential, there may be additional risk involved. Before making a decision, consider your time horizon and tolerance for risk. Consulting with a financial advisor can help you understand which options might be best for you.
