In a cash account, there are multiple regulatory guidelines to be aware of when trading. Below we’ve outlined a few of the most commonly encountered issues.  These rules apply to cash accounts.

In a cash account, it is required that all trades be paid for in full by the settlement date.  As opposed to trading under margin, purchases must be paid for with settled funds prior to settlement which is T+2 days after the transaction takes place.  So, for example, if you placed a trade to buy 100 shares of XYZ stock on Monday for $1,000 - you would need $1,000 in Settled Funds available by the Wednesday.

There are three primary types of Cash Account violations:

Good Faith Violations:

This type of violation occurs when you make a purchase and sell it prior to paying for the initial purchase with fully settled funds.  Only settled cash or proceeds from fully paid for securities qualify as settled funds.

Ramifications: If this occurs more than 3 times within a 12 month period in a cash account your account will be restricted for 90 days.  This means you will only be able to make purchases when you have fully settled cash available up front.

Cash Liquidation Violations:

This type of violations occurs when you sell a fully paid for security a day or more after a purchase to cover the buy.  This creates a violation as the rules specify you must have fully settled cash in your account on settlement date. Here’s an example:

On Monday, you purchase 100 shares of XYZ stock for $1,000.  On Tuesday, you sell 150 shares of ZYZ stock for $1,500 to cover this purchase.  

Ramifications: If this occurs more than 3 times within a 12 month period in a cash account your account will be restricted for 90 days.  This means you will only be able to make purchases when you have fully settled cash available up front.

Free Riding Violations:

Free riding occurs when you purchase a security and sell the security prior to settlement in order to cover the initial purchase.  

Here’s an example:

You have $0 available in settled cash and on Monday you purchase 100 shares of XYZ stock for $1,000.  You do not send any funds to cover this purchase and on Wednesday, you sell the 100 shares for $1,500 to cover the initial purchase.

Ramifications: If this occurs more than 3 times within a 12 month period in a cash account your account will be restricted for 90 days.  This means you will only be able to make purchases when you have fully settled cash available up front.

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