What Is a Good Faith Violation in a Cash Account?

You sold a stock this morning. An hour later the proceeds bought another. That one you sold before the close. Every order filled, and tonight your account shows a message about a good faith violation.

The answer is timing.

A cash account requires every purchase to be paid for in full with settled money. Brokers generally let you place a buy using proceeds from a sale that has not settled yet, on the good faith assumption that the cash will arrive before the purchase needs paying for, and that courtesy is where the rule lives: if you then sell the new position before those original proceeds have settled, you have sold something that was never paid for with settled funds, and the broker records a violation.

A timeline under T+1

For most US stocks, settlement comes a business day after the trade. The window for trouble is short, and it is easy to walk into, because nothing on the order screen stops you from selling a position bought with money that is still in transit.

Buying with unsettled proceeds is allowed. Selling the thing you bought, before the proceeds behind it settle, is what counts. The whole mechanism rests on the settlement date of the first sale, so weekends and market holidays stretch the danger zone: sell on a Friday and the proceeds settle Monday, or Tuesday if Monday is a holiday.

A sale that lands on a loss or a gain makes no difference. Neither does the size of the trade.

What happens after one

Consequences come from broker policy, applied under the Federal Reserve’s Regulation T, which governs how brokers extend credit and how cash accounts must be paid for. One violation usually produces a warning and a note on the account. Repeated violations within twelve months commonly lead to a restriction. While it lasts, you can buy only with settled cash.

The trigger count and the length vary by broker. Check yours. It is usually set out in the cash account agreement or a help page on trading with unsettled funds, and support can tell you how many violations are already on your record.

During a restriction you can still trade. You just lose the ability to use unsettled proceeds, which for an active cash account means waiting a business day after every sale before the money works again.

A closely related violation is harsher. Selling shares to pay for the purchase of those same shares is freeriding. It can freeze the account for longer.

How to avoid it

Track settled cash. That one number solves almost every case.

Most platforms show several balances side by side, with names like cash available to trade, cash available to withdraw and settled cash, and the one that matters here is settled cash, or whatever your broker calls the balance that leaves out proceeds still waiting to settle. Find it. Buy only with that figure and a violation cannot happen. Every position is then paid for before you sell it.

Some brokers warn you before an order that would create a violation. Many do not. Relying on a warning that may never appear is a poor plan.

If you want to trade in and out quickly, a cash account asks you to keep part of your balance idle so that tomorrow’s settled cash covers today’s trades. Some traders split the balance in two. Each half trades on alternate days. The case for learning this way is in start in a cash account.