In a cash account, you must pay for the purchase of a security (meaning that the trade must settle) prior to selling that security. If you buy a security and then sell that same security without paying for the security in full by settlement date, the trade is considered a Good Faith Violation (GFV).
This example would be considered a violation:
A cash account has a current cash balance of $10,000.
On Trade Date, the account buys $10,000 worth of "ABC" stock and then sells the same $10,000 worth of "ABC" on the same day.
The account then subsequently buys $10,000 worth of "XYZ" stock using the funds received from "ABC".
While there is no issue with the purchase of "XYZ", if the account sends a subsequent order to sell "XYZ" on the same day, this would trigger a GFV because the funds used to complete the initial purchase of "XYZ" have not yet settled.
An account that commits 3 GFVs within 180 days will be restricted for 90 days, during which the account can only purchase securities using settled funds.
Still got questions? Contact TradeUP Customer Support by email at support@tradeup.com or reach out to us on Live Chat!