Your brokerage account, for the most part, is not an account you want loaded with cash. If you want access to cash for emergency expenses and near-term financial goals, then a savings account is your best bet. Your brokerage account, by contrast, should be loaded with stocks and other investments designed to generate nice returns.
But keeping a small amount of cash in your brokerage account isn’t a bad idea. In fact, it can be a good practice to uphold. Here’s why.
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You don’t want to miss out on buying opportunities
As a general rule, it’s not a good idea to try to time the stock market. If you hold off on investing because you’re waiting for stock values to fall across the board, you might end up missing out on chances to grow your wealth over time.
But if there’s a specific stock you’ve been following for a long time, then in that situation, it is OK to try to buy it at a lower price. To be clear, this doesn’t mean you should chase the lowest price, period. But it’s OK to chase a lower price than what you’ve been seeing.
Let’s say you’ve been looking to add shares of a specific company to your portfolio and they’ve been steadily trading at $200 apiece. Let’s also say that the same company releases earnings and the results aren’t so favorable. The company’s share price might then fall to $180 temporarily due to an overreaction from investors.
Things like this can happen all the time. And in a few days, that stock’s value might rise back up to $200 per share. But meanwhile, you have an opportunity. Instead of paying $200 a share, you can get in at $180. To do that, though, you need to have cash available in your brokerage account ready to go. And that’s why it pays to keep a little cash in your brokerage account. That way, you can capitalize on opportunities like the one just described.
Although some brokerage accounts will allow you to trade on margin (where you’re effectively borrowing from your brokerage account to cover your buys), doing so can be risky. And it’s not always an option.
But it can also take a few days for a transfer of money to clear your brokerage account after leaving your bank account. And when you’re trying to take advantage of a dip in a company’s stock price, you may not have a few days. So it’s important to leave yourself with some cash to trade with.
You may want to pump more cash into your brokerage account ahead of a recession
Recessions and stock market declines don’t always go hand in hand, but they can. So if recession warnings start sounding in full force, it could be worth transferring some extra money into your brokerage account. That way, if stock values do fall, you’ll have an opportunity to load up on quality investments at a discount.
Before you do this, though, make sure your emergency fund is fully set. Only move funds over for investing purposes that you wouldn’t need to cover essential bills in the event of a layoff. But if you have extra money at your disposal, keeping some cash in a brokerage account ahead of a recession also isn’t a bad idea.
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Here’s Why You May Want to Keep a Little Cash in Your Brokerage Account was originally published by The Motley Fool
Source: finance.yahoo.com