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 by the settlement date
• 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 the prescribed time frame

Settlement and Payment

• Most securities settle on a T+1 basis (one business day after the trade date)
• The customer must have sufficient funds to cover the purchase by settlement
• If funds are not available by settlement, the broker-dealer must take corrective action

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 payment is not due until the settlement date (T+1). 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
• 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?