You can find brokers that will offer you all kinds of discounts and special deals. But the wrong choice could cost you hundreds or even thousands of dollars in lost interest.
When you're shopping for a brokerage account, it's only natural to focus on the features that are most important for trading stocks, bonds, and mutual funds. Minimizing your commissions and transaction fees is a great way to keep money in your pocket. Other factors, such as quality of trade executions and customer service, ensure that you'll get the help and support you need when you invest.
But while you're looking for your next winning stock, you'll often have substantial amounts of cash sitting in your brokerage account. With money market mutual funds and high-yield savings accounts yielding around 5%, it's critical that you make sure your uninvested cash is paying you interest while you wait.
Sweep it up
You might think it's not worth it to worry about your spare cash. But you may have more cash on hand than you think. Between stock sales, dividends, and mutual fund distributions, your cash balance could easily top $10,000 from time to time. If you're lazy and let that money sit, you're giving up $500 in interest each year. That's not chump change.
To help investors manage their uninvested cash, many brokerages offer sweep accounts. Basically, these cash management tools check your account every day to see if there's any cash available. If so, the cash is swept into a money market fund or other interest-bearing account. Conversely, if you buy a stock or take a withdrawal, then money will flow out of your money market fund to cover the outgoing funds from your brokerage account.
Check your options
If your broker offers you a sweep option, take a careful look at it. The key is to make sure that the interest rate you're getting is competitive. For instance, Schwab (Nasdaq: SCHW ) offers sweep options that currently pay between 0.95% and 2.99%, depending on your cash balance. However, if your account has more than $500,000, you're eligible for a money market sweep that pays 4.68%. Also, Schwab gives you the ability to purchase money market funds; while this isn't automatic, it does give you a higher yield even if you don't have half a million in your account.
At Fidelity, free cash generally goes into its Cash Reserves money market, which currently pays close to 5%. But with other brokers, you may need to ask for the high-paying option. At E*Trade (Nasdaq: ETFC ) , you can choose among several tax-exempt money funds paying nearly 3% as a sweep option; yet some of its other options pay as little as 0.05%. With many brokers, you have to be vigilant to find the best deal.
Banking with your broker
Another relatively new phenomenon is brokerage firms offering bank accounts. For instance, E*Trade offers a savings account that pays 5.05% -- a much better deal than its typical sweep account. While it's not as automatic as a sweep, transferring funds is sometimes easier with a broker-affiliated bank than with an outside bank.
If you don't know what's happening with your uninvested cash, take a close look at your next statement. To get a better return, talk to your broker about what options will pay you the most interest. It may seem like a minor thing compared to the ups and downs of the stock market, but over time, those interest payments will add up in your favor.
You can learn more about how to make the most from your cash in our Savings Center. Also, check out our Broker Comparison tool to see if you're getting the service and features you deserve from your brokerage firm.
Fool contributor Dan Caplinger does most of his own sweeping. He doesn't own shares of the companies discussed in this article. Schwab is a Stock Advisor pick. The Fool's disclosure policy is clean as a whistle.