- Official Post
Fidelity has a great article with scenarios to explain how someone could violate rules with a cash account. I highly recommend a read of this before trying to day trade.
The one that stood out to me was:
According to industry standards, most securities have a settlement date that occurs on trade date plus 1 business days (T+1). That means that if you buy a stock on a Monday, settlement date would be Tuesday.
Now that we know about settlement timelines we can look at a typical example:
Good faith violation example, Trudy:
- Cash available to trade = $10,000, all of which is settled
- On Monday morning, Trudy buys $10,000 of XYZ stock
- On Monday mid-day, she sells XYZ stock for $10,500
At this point, Trudy has not incurred a good faith violation because she had sufficient settled funds to pay for the purchase of XYZ stock at the time of the purchase. However:
- Near market close on later Monday, Trudy buys $10,500 of ABC stock
- On Monday afternoon, she sells ABC stock and incurs a good faith violation
- This trade is a violation because Trudy sold ABC before Monday's sale of XYZ stock settled and those proceeds became available to pay for the purchase of ABC stock
Consequences: If you incur three good faith violations in a 12-month period in a cash account, your brokerage firm will restrict your account. This means you will only be able to buy securities if you have sufficient settled cash in the account prior to placing a trade. This restriction will be effective for 90 calendar days.
