Cash Accounts

The cash account is the most basic brokerage account and the foundation for understanding more complex account types.

How Cash Accounts Work

• A cash account requires the customer to pay in full for all purchases
• No borrowing from the broker-dealer; the customer pays 100% of the purchase price
• Available to all investors; no special approval or application required
• Regulation T (Federal Reserve Board) requires full payment within one payment period

Settlement and Payment

• Most securities settle on a T+1 basis (one business day after the trade date)
• The Regulation T payment period is the standard settlement cycle plus two business days, so payment for a T+1 trade is due by T+3
• A firm may ask for payment sooner, such as by settlement date, as its own house policy, but that is not the Regulation T deadline
• If the customer has not paid in full by the end of the payment period, the broker-dealer must promptly cancel or liquidate the purchase, unless it has obtained an extension from its examining authority

Exam Tip: Gotchas

Cash accounts require full payment; there is zero borrowing. Do not confuse them with margin accounts.

Freeriding Violations

• Freeriding occurs when a customer buys a security and sells it before paying for the original purchase
• Why it's possible: in a cash account, the trade executes on the trade date but Regulation T does not require payment until the end of the payment period (T+3). That gap between executing the trade and delivering funds is what creates the window.
• Inside that window a customer can buy on Monday, watch the price rise, sell before payment is due, and use the sale proceeds to fund the original purchase without ever putting up their own capital.
• This violates Regulation T because the customer is profiting from securities they never actually paid for
• Penalty: A 90-day freeze on the account
• Exception: no freeze applies if, within the payment period, the customer pays in full (or the customer's check clears) and did not withdraw the sale proceeds before paying
• During the freeze, the customer can still trade but must have settled funds in the account before placing any buy order (no purchasing on credit of unsettled sale proceeds)

Exam Tip: Gotchas

Freeriding is NOT the same as day trading. Freeriding is specifically about selling before paying; it can happen even if the buy and sell occur days apart. The penalty is a 90-day freeze, not account closure. During the freeze, the customer can still buy but must pay upfront with settled funds.

What Should You Check on Exam Day?

• Can you explain why a cash account requires full payment with no borrowing?
• Do you know how freeriding happens and why it violates Regulation T?
• Can you state the length of the freeze penalty for a freeriding violation?
• Do you know what a customer must do to place a buy order during the freeze?
• Can you explain the difference between freeriding and day trading?