A good faith violation occurs when you purchase a security in your cash account with unsettled funds and then sell it before those funds have settled.
- Cash available to trade: $0.00
- On Monday morning, Jack sells 100 shares of ABC stock and for $100 in cash account proceeds. The trade will settle on Tuesday (T+1 settlement).
- On Monday afternoon, he buys shares of XYZ stock for $100.
- Jack sells the XYZ stock at the end of Monday. However, as the purchase of XYZ was made with unsettled funds from the sale of ABC, the transaction is deemed a good faith violation (GFV).
To avoid a GFV, the cash account must hold the XYZ stock until at least Tuesday before selling. Tuesday is the settlement day of the original ABC sale.
If you incur three good faith violations in a 12-month period in a cash account, you will only be able to buy securities if you have sufficient settled cash in the account before placing a trade. This restriction will be effective for 90 calendar days.
A freeriding violation occurs when you sell a security before funds from the initial purchase of that security have settled.
- Cash available to trade: $5,000
- On Monday morning, Trudy buys $10,000 of ABC stock with the intention of sending a $5,000 payment before Tuesday through an electronic funds transfer.
- On Monday afternoon, ABC stock rises dramatically in value due to rumors of a takeover.
- On Tuesday, Trudy sells ABC stock for $15,000 and decides it is no longer necessary to send the $5,000 payment.
A freeriding violation occurred due to the $10,000 purchase of ABC stock being paid for, in part, with proceeds from the sale of ABC stock.
If you incur a freeriding violation in a 12-month period in a cash account, you will only be able to buy securities if you have sufficient settled cash in the account before placing a trade. This restriction will be effective for 90 calendar days.
A cash liquidation violation occurs when you buy securities with insufficient cash to cover the trade, and you cover the cost of that purchase by selling other fully paid securities after the purchase date.
- Cash available to trade: $0.00
- On Monday, Marty buys $10,000 of ABC stock. The trade will settle on Tuesday.
- To pay for the ABC trade, he sells $12,500 of XYZ stock to raise cash on the same day.
A cash liquidation violation occurred because Marty's cash account won't have enough settled cash to cover the purchase of ABC stock, since proceeds from the sale of XYZ stock won't be settled until Wednesday.
If you incur three cash liquidation violations in a 12-month period in a cash account, you will only be able to buy securities if you have sufficient settled cash in the account before placing a trade. This restriction will be effective for 90 calendar days.
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