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A cash account is a brokerage account in which you must pay the full cost of any securities you purchase using settled funds. No borrowing is allowed. You cannot buy securities on margin or sell short in a cash account. The account is governed by Federal Reserve Regulation T, which establishes the settlement requirements for securities transactions. In the United States, most equity and ETF trades settle on a T+1 basis, meaning the funds used to buy securities must be fully available in your account within one business day of the trade date.
Think of a cash account like a debit card: you can only spend money you actually have in your account, and the bank will not lend you anything to cover the purchase.
The most important rule governing cash accounts is the prohibition on freeriding. Freeriding occurs when you buy a security and then sell it before paying for the purchase using proceeds from the sale itself. This is prohibited under Regulation T because it means you completed a round-trip trade without ever putting up any of your own cash. The consequence is a 90-day freeze on your account for that specific violation, during which any purchases must be made with fully settled cash already in the account before the trade is placed.
By law, individual retirement accounts (IRAs), including traditional, Roth, SEP, and SIMPLE IRAs, are required to be held as cash accounts. They cannot be margin accounts. This rule exists because retirement accounts receive favorable tax treatment, and allowing leverage in those accounts would create tax arbitrage opportunities that Congress did not intend. IRAs can still invest in a wide range of securities, including equities, bonds, mutual funds, ETFs, and even options, but all purchases must be settled with existing cash in the account.
The Securities Investor Protection Corporation (SIPC) provides coverage for cash accounts at SIPC member brokerage firms up to $500,000 total, of which up to $250,000 can be cash. This protection applies if the brokerage firm fails, not if the value of your investments declines. SIPC coverage is often confused with FDIC insurance, which covers bank deposits. They are separate systems administered by different agencies.
Sources:
https://www.finra.org/investors/learn-to-invest/brokerage-accounts/cash-accounts
https://www.federalreserve.gov/releases/h15/
https://www.sipc.org/for-investors/investor-faqs
https://www.schwab.com/learn/story/cash-vs-margin-account
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