If you are starting on the path of stock exchanges and stock markets, you must have already heard about Sofi Money, Fidelity, Wealthfront, and Robin Hood. These companies are so relevant in the industry because they offer two types of accounts: brokerage and cash management. Some people involved are not yet fully educated in the system, do not know which one is the best, and compare Brokerage VS Cash Management accounts.
Choosing between one or the other will depend on what your intention is: to spend, save or invest. Although the brokerage houses mentioned above offer both accounts, it is necessary to know that the two are different and play antagonistic roles within the process.
What is a brokerage account?
A brokerage account is a taxable investment account whose purpose is to buy or sell assets such as stocks, exchange-traded funds, bonds, mutual funds, and more. Regardless of the ultimate utility of the account, money can be deposited and withdrawn – making and losing – through investment activities.
Can open a brokerage account with any company permitted to buy and sell securities. The most prominent industries in this guild are Fidelity, Investments, Charles Schwab, E*Trade, and TD Ameritrade; of these, you may consider a self-directed, robot-advisory, and managed brokerage account.
What is a cash management account?
Although a Cash Management Account (CMA) differs from a brokerage account, both are offered by the same companies. They have similar functions to traditional checking accounts. A non-bank financial institution provides this type of account to complement, in certain cases, the investment account.
The CMA can be associated with bank accounts, brokerage accounts, or be held by the brokerage firm itself. For example: if you have an investment account with Fidelity, you can open a CMA owned by the same company and insure it with a financial institution.
What is the difference between a brokerage and a cash management account?
After conceptualizing each of the accounts, you will have noticed that they are completely different alternatives and that each one responds to a specific need. To better identify which is the definitive account, we are going to list a series of differences and similarities:
Differences between the accounts
The differences between brokerage and cash management accounts are as follows:
- Profits come from different investors and different locations. Brokerage account users earn income from market returns, while cash management accounts receive interest from their providers
- Over time, earnings are usually higher for brokerage accounts, but they also run the risk of losing value in a poor market
- Interest management accounts have fixed interest percentages, while brokerage accounts vary by investor performance
- The coverage of each account has a different origin. Brokerage accounts have SIPC insurance coverage in case of theft or bankruptcy. In contrast, cash management accounts are covered by FDIC insurance when the money is transferred to partner financial institutions
- Money in a cash management account is used to pay bills and make purchases, sometimes with debit cards and checks. Money in brokerage accounts is used solely for buying, trading, or selling funds, stocks, bonds, and other securities
Similarities between the accounts
Being such different accounts, as we were able to detail in the previous section, they also have several similarities that we are going to expose here below:
- The brokerage houses offer these two types of accounts
- Both accounts have the potential for cash performance
- Can link both accounts to each other through the same brokerage house
Is a brokerage account better than a cash account?
The purpose of this text is not to identify whether one account is superior to the other but to give you all the tools to choose the one that suits your needs. The best alternative is to establish what your financial goals are and consider the choice based on the following criteria:
How do you want your cash to work for you?
At the cash level, the two accounts work differently. The returns you get with the brokerage one vary depending on the performance in the stock market, but it has a higher potential than the cash management accounts.
Although this is true, there are no full guarantees that the investments are worthwhile; there are always latent risks that you may lose some or all of your money. We recommend, in these cases, that you do not invest the cash you need for the next five years so that you can take care of sudden downturns in the market.
Cash management accounts are stable places to hold and use money. Above all, we recommend those with debit cards and purchasing power for customers.
How do you feel about risk?
A brokerage account allows you to make much more money, but it is important to consider the high level of risk. As previously mentioned, there is no guarantee in the process, and you can lose your entire investment. With cash management accounts, you have more interest and receive less income, but you are not at the disposal of drastic market changes. The latter works just like a traditional bank checking account.
Would you consider having both accounts?
If you need both services, it’s okay to consider having both accounts. With a brokerage firm, you can link the two types of tabs and make transferring funds, investments, expenses, and savings easier.