What is Brokerage cash? Understanding its role in investment accounts

So, you've accumulated some cash in your brokerage account. Perhaps you've made profitable trades, transferred funds from your bank, or haven't reinvested your dividends. You find yourself with cash—this is a good situation to be in.

Before making plans for this money, labeled as brokerage cash in your statements, you need to determine what portion is available for immediate use. Once you've clarified this, you can start making decisions on how to use it.

Brokerage cash can be seen as unexpected found money for some, accumulating quietly through stock sales, dividends, or transfers. You have options: let it earn interest, withdraw and spend it, or reinvest.

However, it's crucial to understand what you can actually spend. Brokerage cash, as labeled in apps like Robinhood, includes various components like unsettled trades and collateral. This means the total isn't immediately available for spending—it's a top-line figure. To find out what's truly available, you need to look for terms like "cash available for withdrawal," as Schwab calls it.

Once you know what's yours to use, you can decide how to manage it based on your financial goals, immediate needs such as bills or vacations, and long-term plans. Since everyone's situation is unique, here are some general guidelines on what you can do with your brokerage cash.

Buy more Stocks, Bonds, ETFs

If you're comfortable with risk and can tolerate short-term fluctuations for potential long-term rewards, continue investing for growth. Reinvest gains from stock sales back into the market and opt for dividend reinvestment to avoid accumulating funds in your brokerage account.

Invest in short-term debt instruments

Considering the possibility of needing your funds soon, but not immediately? Financial advisors often suggest placing your brokerage cash into an ultra-short bond fund. These funds primarily invest in fixed-income securities with shorter maturities, typically less than a year. They aim for higher yields by investing in slightly riskier assets compared to conventional bond funds. It's worth noting that in high-interest-rate scenarios, certain types of ultra-short bond funds may experience increased vulnerability to losses.

Leave it alone

You can choose to leave it untouched. Yes, keep your funds readily available. Typically, it will be moved into an FDIC-insured account where it remains safe. However, the downside is that you'll earn interest comparable to a bank savings account—rather low, but at least your funds will be accessible when needed.

Spend it

Most brokerage firms allow you to use your brokerage cash to pay bills. Charles Schwab, Interactive Brokers, and other platforms offer this option; you simply need to link a payment account. Alternatively, you can use it for expenses like vacations or treat yourself to something nice. Ultimately, it's your money to use as you wish.

What is the distinction between brokerage cash and buying power?

Brokerage cash represents the total cash balance shown in your investment account, inclusive of all funds including those from unsettled trades and collateral. Buying power, on the other hand, refers to the actual cash amount available for immediate use, often labeled as "cash available for withdrawal" after deducting items like unsettled trades and collateral.

What are some examples of conservative options for utilizing brokerage cash?

Investors can opt to leave their money in place, earning a minimal interest rate akin to that of a typical bank savings account. Additionally, if swept into an FDIC-insured account, it remains protected. Another conservative choice includes ultra-short-term funds.

Brokerage cash represents a form of unexpected funds that can accumulate over time from dividends and stock sales. Investors have various choices such as reinvesting it, leaving it for future investment opportunities, or using it for practical purposes like bill payments or even enjoying a vacation.