Rules for Trading in Cash Accounts
Trades placed in a cash account require 2 business days for the funds to fully settle before they can be used to buy and sell again.
Accounts with less than $25,000 dollars are limited to 2 round-trip "day trades" a week (buying and selling on the same day). After 2 round-trip trades, a cash account holder is considered a day trader. A day trader must maintain a minimum balance of $25,000 dollars and is still subject to 2-day settlement rules in a cash account, even if the $25,000 is maintained.
Good-Faith Violations
Good-faith violations occur when the purchaser of a security uses funds that have yet to settle in the account. Each account is allowed to have up to 3 good-faith violations per 12-month rolling period before the account is put into a 90-day restriction on the 3rd strike of a violation. Each good-faith violation will automatically expire after 12 months from the violation date (T/D Date).
- Example 1: You have $10,000.00 in your CASH brokerage account. You spend $5,000 buying a stock and sell it the same day. You will have $5000 left to spend only until the 2-day settlement of funds from your sale have cleared. If you enter another trade before the funds settle above the $5,000.00 you have available, you are at risk for a good faith violation and potential 90-day restriction on your account.
- Example 2: You make a purchase on Tuesday; funds will settle on Friday. You should not attempt to trade on unsettled funds, it can result in a good-faith violation and result in trading restrictions and or account closure.
If you would like to actively trade: If you would like to actively trade in stocks, (more than 2 round trip trades a week), a margin account with a minimum of $25,000.00 should be maintained to avoid active trading restrictions. If you decide to actively trade, become familiar with FINRAS Day Trading Rules.
Read FINRAs Day Trading Regulations
90-Day Restriction
Once the account is placed under a 90-day restriction, the account should no longer enter buy trades during the 90-day period to prevent the account holder from using unsettled funds again. Restrictions are set by the clearing firm when the following occurs:
- When an account triggers a good-faith violation for the 3rd time within 12 months.
- When a trader day trades on unsettled funds.
Read the SEC Guidance for CASH Accounts
https://www.sec.gov/answers/cashaccount.htm
Cash Account as Defined by the SEC
A cash account is a type of brokerage account in which the investor must pay the full amount for securities purchased. An investor using a cash account is not allowed to borrow funds from his or her broker-dealer in order to pay for transactions in the account trading on margin.
The credit extension provisions of the Federal Reserve Board’s Regulation T govern an investor’s use of a cash account to purchase securities. In a cash account, an investor must pay for the purchase of a security before selling it. If an investor buys and sells a security before paying for it, the investor is “freeriding”, which is not permitted under Regulation T and may require the investor’s broker to “freeze” the investor’s cash account for 90 days. During this 90-day period, an investor may still purchase securities with the cash account, but the investor must fully pay for any purchase on the date of the trade.
For more information on cash accounts and their related rules, please read the SEC staff’s investor bulletin:
Read Trading in Cash Accounts – Beware of the 90-Day Freeze under Regulation T