A cash account (also called a "Type 1" account) is a brokerage account in which the customer must pay in full for all securities purchased, without borrowing from the broker.
Key rules:
- Payment due: Full payment must be received by settlement date (T+2 for stocks).
- No short selling: Short sales require a margin account; only long positions are permitted in cash accounts.
- No spreads or uncovered options: Certain options strategies (naked calls, spreads) require margin accounts.
Cash account violations:
| Violation | Description | Consequence | |---|---|---| | Free riding | Selling securities before paying for them (using sale proceeds to fund the purchase) | 90-day restriction (must pay before trading) | | Good faith violation | Buying and selling before full payment of the purchase | Pattern of 3+ = 90-day restriction | | Liquidation violation | Selling a security to meet same-day purchase obligation | 90-day restriction |
Margin vs. cash accounts: - Cash: Lower risk, no interest charges, no margin calls, limited strategy options. - Margin: Higher risk, interest charged on loans, margin calls possible, enables short selling and complex options strategies.
Retirement accounts: IRAs are cash accounts; margin (borrowing) is prohibited in tax-advantaged retirement accounts.
> Exam tip: Free riding is the most common cash account violation — know the definition and the 90-day consequence. IRAs cannot be margin accounts because borrowing would be a prohibited transaction under ERISA.