In a cash account, an investor must pay for the purchase of a security (meaning, the trade must settle) prior to selling that security. If an investor buys a security and then sells that same security without paying for the security in full by settlement date, the trade is considered a Good Faith Violation (GFV).
An example that 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 stock in symbol "ABC" and then sells the same $10,000 worth of "ABC" on the same day
The account then subsequently buys $10,000 worth of stock in symbol "XYZ" 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 be a GFV violation because the funds used to complete the initial purchase of "XYZ" have not yet settled.
The end of day surveillance process would consider both of these scenarios to be GFVs. Accounts that commit 3 GFVs within 180 days will be restricted for 90 days, during which time the account can only purchase securities using settled funds.
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