Nowadays, technology has made it possible to buy shares in the stock market in the most practical way. There are countless applications, accounts, or pages where a person can access the stock market or actively save their funds. Hence the question: fidelity cash management account vs. brokerage account? Let’s see which option fits you better.
Fidelity Investments is an American bank that originally specialized in accounts related to pension plans. However, now it offers several types of accounts that help you invest while having the money already in the account, such as the purchase of stocks, for instance, the management account and the brokerage account. Both have similar purposes and some differences.
Cash Management Account
The Cash Management account is a checking account offered by Fidelity; the difference with a traditional checking account is that the banking financial services do not fully manage it since the purpose of the account is not simply to keep the money.
It also works by helping the customer invest money to have more savings in the future; that is, it serves as a savings method. Therefore, it is an investment account; the bank will grant monthly interest according to the amount of money saved in the account.
Brokerage Account
The brokerage account is an account for investors; the purpose is to buy and sell stocks, bonds, and mutual funds.
Brokerage accounts can be opened in all those companies that are authorized, both those that sell shares that have a low value on the stock market and large shares. Brokerage accounts can be opened personally or through a company.
This type of account allows you to deposit and withdraw money like any bank account; the difference is that you also have the option to access the stock market to buy shares.
How does the stock market work?
The stock market is born to intertwine two entities, the companies that need income to finance new products or projects, therefore, to sell shares and the natural persons who act as investors in these companies.
By buying shares, the investor helps the company and, in return, can generate profits if the shares are well positioned in the stock market, which means that there is also the possibility of losing or decreasing the investment. The person knows from the beginning that it is a possible risk.
Similarities between Cash Management and Brokerage account
Both accounts aim to improve the customer’s savings system, but they also have other things in common in their operation.
Similarities between Cash Management and Brokerage accounts
| Similarities between Cash Management and Brokerage accounts | |
| Brokers | Both types of accounts are offered by brokers linked to the bank, in this case fidelity. |
| Returns | Both the brokerage account and the cash management account offer the possibility of earning returns in cash, i.e. the interest earned can be purchased in cash. |
| Connected to one another | Both objectives go hand in hand, so the client can decide to open both and benefit from linking them together as long as they are from the same bank. |
Differences between Cash Management and Brokerage accounts
While it is true that both accounts help the client improve his savings system, they operate in different ways.
The income
Each one generates extra income from the money saved but do not belong to the same fund. The first thing is that the source of earnings differs from the cash management account, which gains through interest, while the brokerage account multiplies through investments.
Another difference in the income is the entity that grants it; clients with a cash management account receive the revenue through their provider, i.e., the bank. On the other hand, brokerage accounts obtain their revenue from the stock market’s performance, i.e., the company they invested in by purchasing shares.
Earnings
The rate at which earnings are made represents a major difference. Cash management accounts do not offer as high a profit as brokerage accounts could offer; however, the latter can either generate more profit or lose value and create losses. It all depends on the stock market.
Income stream
Cash Management accounts are known for having fixed interest rates. Therefore, the flow of income is controlled, and the client knows at what time of the month the interest will come in. On the other hand, brokerage accounts maintain a constant flow of income since they can vary according to the investments made and the flow of the stock market.
Insurance
Both types of accounts offer insurance coverage, but their sources are not the same. The Securities Investor Protection Corporation (SIPC) provides coverage in the event of theft or bankruptcy of the brokerage account company.
In the case of the cash management account, they are covered by The Federal Deposit Insurance Corporation (FDIC) if money is left floating between the bank and the account when the deposit is received.
Use of the accounts
While the cash management account’s primary purpose is to pay bills, it can also be used to make purchases at stores by having a debit or credit card associated with the account and requesting an associated checkbook from the bank.
On the contrary, the brokerage account is designed to purchase stocks, bonds, and funds and its banking movements are strictly limited to said assets.
Benefits of Cash Management account
A cash management account is built on an operating system similar to a traditional checking account. However, the differences between one and the other make it advantageous in today’s financial panorama.
Speed and profit go hand in hand.
The client can streamline his banking operations with the cash management account and generate interest in cashing transactions or deposits. Additionally, it is possible to manage a credit account linked to the cash management account so that, when using the card, the investment values rise without transferring the money to another account.
Higher interest rates than current or savings accounts
As it is an account designed to generate interest, it does so in higher than average rates, raising the annual percentage compared to what traditional bank accounts offer.
Benefits of brokerage account
A traditional account offers an effective savings method to deposit money and then use it to pay third parties, bills, or companies; brokerage accounts provide the benefit of only existing as an active savings method, with no transfers to divert capital.
Easy to Invest
The world of investments in the stock market may sound intimidating; however, with brokerage accounts, the incentive to buy shares easily and safely is because the broker is the one who is responsible for making feasible and successful investments, for which he is paid a percentage that the same account generates.
Active savings
With this account, it is impossible to save since it forces you to have the money in constant movement through investments; the client only has to choose which stocks or funds to buy, and the money begins to generate a continuous flow.
Return on investment
The brokerage account system provides a medium and long-term return on investment. Therefore, profits will not only start once the bonds, funds, or stocks rise in the stock market; even higher yields can be projected with long-term investments.
How to determine which is better for me?
Both are non-traditional options to generate profits with a common goal but a different path. It all depends on which one best suits your way of thinking; there are several elements to consider when choosing which account is best for you.
Taking risks: yes or no
As the saying goes, no risk, no reward. However, risking money is a whole other story. If you are cautious with your money and prefer stability, the cash management account is better for you. It may generate less income, but there is no fluctuating traffic in using savings.
Suppose you like to take risks and gamble a little more. In that case, the brokerage account is ideal, it can earn much more than a cash management account because of the investments, but there is always the risk of generating losses. In this aspect, it will depend on whether or not you like the risk.
Cash constantly working
Another way to decide which account best suits the client is to focus on how the money works in each one. In the cash management account, the money generates slower income; however, there is the certainty that, even if it is not flowing much, it is doing its job of generating interest.
With the brokerage account, the invested money is constantly flowing in the market, maybe improving or decreasing. Still, it is continuously at work on the projects or products generated in the company where the shares were bought.
A possible solution, having both accounts.
Fidelity provides both types of accounts, one safer but less profitable and the other with a possible better gain but less financial stability.
Therefore, one option that may be viable for clients who cannot decide between the two is to open both; why is it beneficial? Brokerage and cash management accounts can be associated with each other as long as they are granted from the same bank.
By having the two types of accounts linked, it is possible to transfer money from one account to the other, which can generate the following scenario: a certain amount of shares is invested in the brokerage account, and if a profit is generated, that money can be transferred to the cash management account so that it has more savings and therefore generates more income.