Good-faith violation / free-riding.
In plain English
In a cash account, the money from selling an investment takes a day or more to settle before it is truly available. A good-faith violation occurs when you buy a security with unsettled proceeds and then sell it before those proceeds settle, in effect trading on money you do not yet have. A related term, free-riding, is buying and selling without ever paying with settled cash. Brokers track these, and repeated violations can get your account restricted to settled-cash-only trading for months. The fix is simple: trade with settled funds, or use a margin account, which is not subject to these rules the same way.
01Why it matters
Repeated good-faith violations can freeze a cash account for months, so understanding settlement timing keeps an active trader from tripping the rules by accident.
02The math, step by step
You sell a stock Monday and immediately use the unsettled proceeds to buy another, then sell that one Tuesday before Monday's cash settles. That is a good-faith violation, and a few of them can restrict your account to settled funds only.
03What this is NOT
A good-faith violation is NOT a margin-account issue. It applies to cash accounts, where you must use settled funds; margin accounts borrow instead and are not governed by these settlement rules the same way.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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