This is not investment advice. The information provided is for educational and informational purposes only and does not constitute a recommendation to buy or sell any financial product.
Many brokers pay interest on the cash balance in a trading account, and the interest is a way for the broker to pass on a portion of the central bank rate to the trader. The interest is paid on the uninvested cash, and the interest is credited to the account on a monthly or quarterly basis. The trader who keeps a cash balance in the trading account can earn a small return on the cash, and the return is in addition to the trading gains.
How the interest works
The broker holds the cash in a segregated account at a bank, and the bank pays interest on the cash. The broker passes on a portion of the bank interest to the trader, and the broker keeps a portion as a fee. The portion passed on to the trader is called the "trader's interest rate," and the portion kept by the broker is called the "broker's spread."
The trader's interest rate is usually slightly below the central bank rate, and the broker's spread is usually 0.5 percent to 1.5 percent. For example, if the central bank rate is 4 percent, the trader may receive 2.5 percent to 3.5 percent, and the broker keeps 0.5 percent to 1.5 percent.
The interest is calculated on the daily cash balance, and the interest is credited to the account on a monthly or quarterly basis. The interest is compounded, and the compounded interest adds up to a meaningful amount over time.
The typical rates
The typical rate for a retail client in the European Union is 2 percent to 4 percent per year on EUR balances, and the typical rate is 4 percent to 5.5 percent per year on USD balances. The rates are higher on USD balances because the Federal Reserve has been more aggressive than the European Central Bank.
The rates vary by broker, and the rates depend on the broker's relationship with the bank. The broker who has a tier-1 bank relationship can offer higher rates, and the broker who has a smaller bank relationship can offer lower rates. The trader should compare the rates across brokers, and the trader should look at the rate on the trader's base currency.
The factors that affect the amount
The first factor is the cash balance. The trader who keeps a larger cash balance earns more interest, and the trader who keeps a smaller cash balance earns less interest. The cash balance is the average daily balance, and the cash balance is calculated by the broker.
The second factor is the base currency. The trader who holds a USD balance earns more interest than the trader who holds a EUR balance, and the trader should consider the base currency when opening the account. The base currency affects the interest rate, and the base currency affects the currency conversion fee.
The third factor is the account type. Some account types pay a higher interest rate, and the premium account may have a higher minimum balance. The trader should weigh the higher rate against the minimum balance, and the trader should look for the account type that matches the trader's balance.
The fourth factor is the broker's policy. Some brokers pay interest on the full cash balance, and some brokers pay interest only above a threshold. The threshold is usually €1,000 to €10,000, and the trader should check the threshold before opening the account.
The pros and cons of earning interest
The first pro is the low-risk return. The interest is a low-risk return, and the interest is paid by the broker on the segregated cash. The trader who keeps a cash balance in the trading account earns a small return without taking any risk, and the return is in addition to the trading gains.
The second pro is the liquidity. The cash is available for trading at any time, and the trader does not need to transfer the cash to a separate account. The liquidity is useful for traders who want to be ready to trade, and the liquidity is useful for traders who want to avoid the transfer time.
The first con is the low rate. The interest rate is below the central bank rate, and the trader can earn a higher rate by moving the cash to a high-yield savings account. The trader should compare the rate with the rate at a bank, and the trader should consider the convenience of the trading account.
The second con is the inflation risk. The interest rate may be below the inflation rate, and the real return on the cash can be negative. The trader who keeps a large cash balance in a low-interest environment is losing purchasing power, and the trader should consider investing the cash in stocks or in bonds.
Common questions about interest on cash
Is the interest guaranteed? No, the interest is not guaranteed, and the broker can change the rate at any time. The broker usually announces the rate change in advance, and the broker's rate is usually tied to the central bank rate.
Is the interest taxable? Yes, the interest is taxable income in most jurisdictions, and the broker issues a tax form at the end of the year. The trader should report the interest on the tax return, and the trader should consult a tax advisor for the local rules.
Can I lose the cash that earns interest? No, the cash is held in a segregated account, and the cash is not at risk. The interest is paid by the broker, and the cash is returned to the trader if the broker goes bankrupt.
Related resources
Where to start
If you are evaluating interest on the cash balance, the most useful first step is to compare the rates across three to five brokers, and to check the threshold and the base currency. Our broker comparison lists the brokers and the interest rates on cash, which together tell you what the broker pays before you open the account.