First things first, please feel free to check out this FAQ about settled funds.
It’s a super important piece of Cash Account Violations and how to avoid them 😊
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.
We know that’s a little confusing, so here’s an example:
Let’s say that on Monday, you sell Stock A for $100.
You immediately use that money to buy $100 worth of Stock B.
On Tuesday, you sell Stock B.
Why is this bad?
This is a problem because you sold Stock B before the funds you used to purchase it in the first place were settled. Funds from selling a stock are reflected in your Public account right away, but remember: until the trade settles in 2 business days, those funds are not settled.
What happens if I mess up?
If you get more than 3 Good Faith Violations within a 12 month period, your Public account will be restricted for 90 days. Think of this as a “Safe Mode” where you’ll only be able to sell stock, or purchase stock with fully settled funds.
BUT. If you get more than 4 Good Faith Violations in a 12 month period, all of your stock might be sold and your Public account will be closed for 90 days. We know this sounds extreme, but this is actually a policy from our Clearing Firm, and there’s absolutely nothing we can do about it. It’s a bummer, so try to avoid it at all cost.
Yikes. How do I avoid this?
The easiest way to avoid a Good Faith Violation is to make sure you’re only ever purchasing stock with settled funds.
Cash Liquidation Violations:
Cash Liquidation Violations are less common on Public, but let’s walk through it.
This is easier to explain by jumping straight into an example:
Let’s say that on Monday, you buy Stock A for $100.
On Tuesday, you realize you don’t have $100 in cash available, and sell $150 worth of Stock B – which is fully settled – in order to cover the cost of buying Stock A.
Why is this bad?
This is a problem because you bought Stock A without actually having enough settled funds to complete the purchase, and the funds from selling Stock B won’t settle in time to pay for it.
What happens if I mess up?
If you get more than 3 Cash Liquidation Violations within a 12 month period, your Public account will be restricted for 90 days. Again, this is really a “Safe Mode” where you’ll only be able to sell stock, or purchase stock with fully settled funds.
How do I avoid this?
This is actually relatively hard to do with your Public account, but it can happen. Just make sure you don’t spend more money than you have in your account when purchasing stocks.
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?
TLDR: 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 Live Chat or via email at support@public.com! 😁