The amount of uninvested cash in your investment account is known as brokerage cash. Not all the cash is likely available to invest or withdraw because it is a top-line amount that does not consider unsettled trades or margins.
For example, you may have transferred money from your bank account, received a dividend or interest payment, or decided to sell some stock. Cash can also grow in a brokerage account for other reasons.
How Brokerage Cash Works
You create a brokerage account with cash deposits and use the money to buy financial assets such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Both day trading for quick profits and investing for long-term goals use brokerage accounts.
Most brokerage accounts offer a way to earn a respectable return on uninvested money. Your brokerage account is maintained by a broker who acts as securities custodian for your account.
The broker has the job of working as an intermediary between the stock market and you, buying and disposing of assets as they direct.
You can open a brokerage account with a wide variety of firms, including online and automated robo-advisors and full-service brokers with a broad menu of financial services.
Requirements and fees may change. Requirements for opening an account may include a minimum balance, administrative fees from some firms, and trading commissions for buying or selling specific assets.
Can I earn interest on brokerage cash?
Many firms allow you to choose a cash management program when you open a brokerage account. Your broker may call it a “cash sweep,”
which means it will automatically “sweep” uninvested funds from deposits, dividends, or interest payments into a linked bank account.
These programs earn interest, but most have rates on par with what you might get in a bank savings account. It’s not uncommon for cash in a brokerage account to yield 0.01% APY, which translates to an annual return of about $1 on $10,000 in brokerage funds.
However, even “preferred” accounts typically earn less than 1% APY. Some firms offer a higher interest rate for larger deposits.
You can rest easy knowing that your brokerage cash is safe because cash management systems in the brokerage industry typically have FDIC protection.
On the other hand, investors looking to grow that cash might be better off exploring possibilities outside a cash sweep deposit program.
How can I use my brokerage cash?
Every year you lose money in a savings account or cash sweep program in an environment of low-interest rates and rising inflation. If you want to maximize the use of your brokerage funds, you can choose from some of these possibilities:
You can invest your brokerage funds in various stocks, bonds, or exchange-traded funds if you do not need access to cash currently and want to focus on long-term growth. It is certainly a suitable alternative to acquiring higher returns.
Buy short-term bonds
Because fixed-income products are generally less volatile than the stock market, they provide greater short-term security.
While they may have higher interest rates than a cash sweep program, you are essentially “locking in” those funds for the life of the bond or CD, and withdrawing the cash before maturity can mean a loss on the investment made.
Some brokerage firms allow you to use your available funds to pay bills directly from your brokerage account. It would help to evaluate which ones you can do this with and request all the necessary information and requirements before you begin the process.
Return the money to your bank account
Once the money has been settled, you can transfer it back to your bank account to meet the remaining expenses. Although this is not the best option if you are looking to improve your income, it is an available alternative.
You can leave it as brokerage cash if you think you may need to access the money but don’t want to take on more risk.
Some investors prefer to keep a portion of their portfolio in cash as “dry powder,” meaning they hold their money anticipating a market downturn where they can buy securities discounted.