It is likely that your brokerage account has experienced positive performance in the past few years, with the Dow Jones industrial average and the S&P 500 both increasing by more than 50% since November 2022. However, the same cannot be said for the cash in your brokerage account.
You can earn a higher annual percentage yield (APY) by opening a savings account at some online banks rather than at brokerages.
According to Greg McBride, CFA, who is Bankrate’s chief financial analyst, people often overlook the fact that the cash in their brokerage account has earning potential. Although it may be waiting for the next investment opportunity, it’s crucial to ensure that it’s earning a competitive return in the meantime.
If you have cash in a brokerage account, here are three things you can do.
1. Check the interest you’re earning – or not earning
To start, find out how much interest your cash is earning at the moment. You can do this by reviewing your brokerage account statement, logging in to your account, or contacting your brokerage to determine the type of account your cash is in and its current performance. Additionally, ensure your dividends are being reinvested; otherwise, they may accumulate in an account with a low yield.
According to McBride, some brokerages have changed the default cash holding option from money market funds to FDIC-insured bank accounts, which can be confusing for investors. While this may sound like a safe option, the yield on these accounts is only around 0.1 percent, compared to the 2 percent yield you can get on a money market fund.
According to McBride, to determine whether your cash is in a savings account or a mutual fund, you should check for the APY (annual percentage yield) or the name and ticker symbol of the fund. If the information is not provided and it simply says “cash” or a similar term, it may indicate a low-yielding bank account. Additionally, make sure to check if you’re receiving monthly interest payments. If not, it’s likely that you’re not earning any interest.
2. Know whether the account is insured
Please be aware that there is a difference between a money market mutual fund and an FDIC-insured money market account. Money market mutual funds are considered securities and may be protected by the Securities Investor Protection Corp. (SIPC) if held at an SIPC-member broker-dealer. However, this protection does not cover any losses due to market fluctuations. For more information, please visit SIPC.org.
According to McBride, although some people believe they are identical, there are slight distinctions between bank accounts and money market funds. McBride explains that from a protection perspective, bank accounts are secure due to federal insurance, while money market funds are also secure. Major brokerage and mutual fund companies will do everything possible to maintain their mutual funds’ one-dollar net asset value. Such companies risk losing their reputation and investors’ capital if the value drops below one dollar.
According to McBride, money market funds are expected to provide yields that are competitive and can adjust to market fluctuations. Therefore, keeping money in such funds can be a wise option if you require funds readily available for trading purposes.
You can consider keeping your uninvested money in FDIC-insured savings accounts that have an APY of 2.26 percent. Unlike brokerage account savings, these accounts give you higher yields. McBride suggests that FDIC-insured bank accounts offered by brokerages are not profitable as the brokerages get the return instead of the account holder. Hence, they pay next to nothing.
3. Find a better place for your emergency savings
McBride suggests that keeping your emergency fund in a high-yield online savings account is important, as inflation can cause the loss of its purchasing power when you need to use the funds.
According to McBride, investing in a brokerage account can provide a better yield than money funds, making it a great option for cash that you want to use for buying stocks when the market presents good opportunities.
According to McBride, it’s not a good idea to keep your entire emergency fund in a brokerage account’s money market fund. This is because you could earn higher interest by keeping your fund in an FDIC-insured online savings account.