If you have an online brokerage account, you transfer money from a bank account to your trading account. You have cash-on-hand. You're not relying on credit, and you're not relying on margin.
You are cash trading. You buy stocks with cash. You buy ETFs with cash. You purchase bonds with cash. Under this system, you have two days to settle your purchases. You get the stock from someone else’s account. And they get your cash.
Cash trading is a far more conservative, less risky method of investing. If you purchase $5,000 in stocks from a cash trading account, the most you can lose is $5,000. Margin can lead to much more significant losses, and you could be forced to hand over collateral to meet your obligations should your positions turn negative.
The primary downside of cash trading is that it can take one or two days to settle trades. Which means that, if you sell a stock, you’re not going to get your cash right away to buy a different stock. You'll have to wait for the trade...and the dust...to settle.
Related or Semi-related Video
Finance: What is a Money Market Fund?80 Views
finance a la shmoop. what is a money market fund? isn't it a strange concept
to think about going to a market to buy money? [man walks through grocery store]
well yeah it's strange but the practice exists and it's a huge multi trillion
dollar market today. the key word here is money and not investment. why such a big
diff? well because the notion of investing implies duration. that is when
you invest in a nice fixer-upper home or a tractor distribution company or shares
in a fat dividend-paying bank you're investing for presumably a long time [people stand in line]
like years maybe decades maybe centuries if you can find the right miracle pill.
but here we're talking about money like the stuff you can buy candy with. so it's
short term not long and a money market fund basically comprises many series of
pretty safe bonds that are all coming due in the next 30 to 90 days. sometimes [pie chart]
longer than that sometimes shorter but generally in the very near future. so why
would you care about a money market fund? well because it pays you slightly more
interest on your money than say a bank checking account. and lots of people in
corporations need cash just sitting around to pay their bills, so there are
tons of money market funds out there available and that's the gist of a money
market fund. we're sure you'll have plenty of experience with them by the
time you hit your sixth hundredth birthday day [people cheer and hold birthday cake]
Up Next
What is Cash on Delivery (COD)? In transactions where buyer and seller are not physically in the same place, a Cash on Delivery transaction is one...