If you just opened a brokerage account, you may be wondering what the section in your account titled “brokerage cash” means. Brokerage cash, account value, buying power, it’s easy to be confused by the different components of your account.
Let’s look deeper at brokerage cash and find out what exactly you can do with this money in your account.
Brokerage cash refers to the total amount of uninvested money in your brokerage account. Sometimes called “uninvested cash” or “cash to invest,” brokerage cash can include instant deposits, unsettled funds and dividend payments, among other things.
In short, brokerage cash is the difference between your portfolio value and your investments’ value.
Some brokerage firms allow you to earn money on your brokerage cash through cash sweep programs. Through these programs, a broker sweeps your uninvested cash from your brokerage account into an affiliated, interest-bearing savings or money market account with one or more partner banks. Interest rates vary across brokers, but as of February 2024, the best broker cash sweep rates pay around 5% annual percentage yield (APY). Compare that to the average savings account rate of 0.46%.(1)
There are several ways to make use of your brokerage cash, like investing it or using it to pay bills. Here are a few options:
Whereas brokerage cash refers to the uninvested cash in your account, buying power is the amount of money you can use to purchase stocks, ETFs or other securities available through your broker.
Buying power is calculated by subtracting things like pending orders, options collateral and restricted cash from your brokerage cash. The amount of your uninvested cash and buying power won’t necessarily always match.
For example, say you have $50 in your brokerage cash balance, and you place a limit order to buy one share of XYZ stock at $10. XYZ stock currently trades at $15 per share, so the limit order is pending. A limit order is an order to buy or sell a stock at a specified price. At this point, your brokerage cash will still be $50, but your buying power will be $40. The $10 difference is the reserved money for the pending order. You have $40 available to buy more securities.
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Brokerage cash is uninvested money in your brokerage account that may come from bank transfers, dividend payments or the sale of securities. While you can use brokerage cash to invest, the best brokerage accounts pay interest on this cash through cash sweep programs or cash management accounts.
Yes, you can withdraw settled brokerage cash at any time.
Brokerage cash services or programs refer to ways your brokerage firm can use your brokerage cash to your advantage. For example, some firms pay interest on your brokerage cash by sweeping it into an affiliated savings or money market account.
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