Usually, if you’re buying or selling stocks at a relatively leisurely pace, let’s say once a week, you’ll never run into an issue. Invest away. However, if you’re investing at a faster pace, you can sometimes come up against what’s called a Cash Account Violation. This is exactly what it sounds like, and means that you’re not exactly following the rules of a cash account.
Good Faith Violation
A Good Faith Violation happens when you purchase stock, then sell it again before the funds you used to buy it with have settled in your Public account. How did this happen? Your investment may have been sold before it was paid for with settled
funds, causing the violation. A cash account, which is the type of account you have at
Public.com, requires you to pay for all purchases in full by the settlement date.
You sold $AAPL on Monday morning for $1,000. Settlement is Wednesday, due to the trade date plus two business day settlement (T+2).
If you bought $TSLA for $1,000 on Monday afternoon and then sold $TSLA prior to
Wednesday (the settlement day for $AAPL), you will not have settled funds for the purchase and will have a good faith violation.
If you choose to buy another stock or the same stock for $1,000 on the same day (Monday) and then sell prior to Wednesday, you will receive a good faith violation because no good faith effort was made to deposit additional cash to pay for the trade.
If you receive four or more good faith violations in the same 90-day period, your account will first be restricted to buying with settled funds only. After the fifth violation, your account will be restricted to “sell only” for 90 days. These are clearing house restrictions and we are not able to remove these restrictions during the 90-day period. To avoid this in the future, you can wait to make your buy until your sale has settled or add more funds to your account.
Free Riding Violations happen when you buy a stock, then sell it again before it settles in order to cover the cost of buying it in the first place.
Here’s an example:
Let’s say that you have $0 of settled funds in your account.
On Monday, you buy Stock A for $100.
On Tuesday, you still don’t have $100 of settled funds, so you sell Stock A for $150.
Why is this bad?
This is a problem because you bought Stock A without actually having enough settled funds to complete the purchase. This means that you should not have been able to buy it, and therefore should not have been able to make money on it.
What happens if I mess up?
If you get more than 3 Free Riding Violations within a 12 month period, your Public account will be restricted for 90 days. Remember, this is a “Safe Mode” where you’ll only be able to sell stock, or purchase stock with fully settled funds.
How do I avoid this?
The easiest way to avoid a Free Riding Violation is to make sure you’re always purchasing stock with fully settled funds. Noticing a theme?
In short: The easiest way to avoid violations is to wait until your funds have fully settled before using them to invest.
If you ever have questions, the team is always here for you, so feel free to give us a shout on the app’s Chat or via email at firstname.lastname@example.org.