As an investor, you may have come across the term “brokerage cash” in your Robinhood account statements. While it may sound like free money, understanding what it is and how to use it can be a bit confusing. In this guide, we’ll break down what brokerage cash is, how it differs from buying power, and what you can do with it.
What is Brokerage Cash in Robinhood?
When you sell a stock, receive a dividend, or transfer funds into your Robinhood account, the resulting cash balance is referred to as brokerage cash. Essentially, it’s the uninvested cash sitting in your account that hasn’t been used to purchase securities.
However, it’s important to note that not all of your brokerage cash is immediately available for trading or withdrawing. That’s because brokerage cash is a top-line number, which means you need to strip out items like unsettled trades and collateral before arriving at the sum that you can spend.
How Does Brokerage Cash Differ from Buying Power?
Brokerage cash is not the same as buying power, which is the amount of cash available to you immediately for trading or withdrawing. Buying power is the bottom-line amount of cash that you can use to purchase stocks, options, or cryptocurrencies.
In other words, while brokerage cash represents the total cash balance in your account, buying power is the amount of cash you can actually use for trading or withdrawing after taking into account unsettled trades and collateral.
What Can You Do with Your Brokerage Cash in Robinhood?
Now that you understand what brokerage cash is and how it differs from buying power, let’s look at some of the ways you can use it.
Buy More Stocks, Bonds, or ETFs
If you’re looking to invest in the stock market, using your brokerage cash to buy more stocks, bonds, or ETFs is a straightforward option. You can use your available funds to invest in companies or funds that align with your investment goals and risk tolerance.
Put Your Cash in a Short-Term Debt Instrument
If you need to keep your money safe but still earn some interest, you can put your brokerage cash in an ultra-short bond fund. These funds hold fixed-income securities that mature in less than one year and typically offer higher yields than traditional bond funds. However, it’s important to note that these funds can be riskier than traditional bond funds and may be more susceptible to losses in a high-interest rate environment.
Leave Your Cash Alone
If you don’t need to use your brokerage cash right away, you can let it sit in your account and earn interest equivalent to that of a bank savings account. While it’s not the most lucrative option, it’s a low-risk way to keep your money safe and accessible when you need it.
Pay Bills or Spend Your Cash
Robinhood allows you to use your brokerage cash to pay bills or spend it on anything you want. You can set up a cash management account with the brokerage and use your available funds to pay bills or make purchases with a debit card.
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Should You Use Margin with Your Brokerage Cash in Robinhood?
Robinhood offers margin accounts, which allow investors to borrow funds from the brokerage to purchase securities. While margin trading can potentially increase your buying power, it also comes with additional risks.
If you’re considering using margin, you should carefully evaluate your investment objectives, risk tolerance, and financial situation to determine whether it’s the right strategy for you. Keep in mind that margin investing involves the risk of greater investment losses and requires you to pay interest on the borrowed funds.
Conclusion | What Is Brokerage Cash in Robinhood?
In conclusion, brokerage cash can be a valuable asset for investors to have in their accounts. Whether you choose to invest it, park it in a short-term debt instrument, or spend it on bills or other expenses, it’s important to understand the difference between brokerage cash and buying power, as well as the limitations of cash accounts versus margin accounts.
Remember to always consider your own investing goals and risk tolerance before making any decisions with your brokerage cash.
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FAQs | What Is Brokerage Cash in Robinhood?
Q1: Can I withdraw my brokerage cash anytime I want?
A: Not all brokerage cash is immediately available for withdrawal. You’ll need to check your account to see how much cash is available for withdrawal.
Q2: How can I earn interest on my brokerage cash?
A: You can park your brokerage cash in a cash management account or an ultra-short bond fund to earn interest.
Q3: What is the difference between a cash account and a margin account?
A: Cash accounts require deposits to clear before they are available for trading, and cannot trade with unsettled funds. Margin accounts allow investors to access funds before they’ve settled, and provide more buying power through margin investing.
Q4: Can I switch between cash accounts and margin accounts?
A: Yes, you can switch between the two types of accounts, but there are limitations and waiting periods involved.
Q5: Is investing with margin-right for everyone?
A: Margin investing involves greater risk and potential for losses, and should only be used by investors who have carefully considered their investment objectives and risk tolerance.
