Overview

  • A freeriding violation occurs when you buy a security using funds from the sale of the same security that has not yet settled. This means placing trades without using your own fully settled cash.
  • A single violation can trigger an immediate 90-day freeze, during which you may place trades only with cash that is fully settled and available on the trade date. No 12-month lookback is required.

If you sell a stock and immediately use those proceeds to buy the same stock before the first trade settles, you could trigger a freeriding violation.

It is a common mistake in cash accounts and often confused with a good faith violation. But freeriding has its own rules and consequences.

Below, we’ll discuss what a freeriding violation is, how it works, how it differs from other violations, and how to avoid account restrictions when trading with unsettled funds.

Table of contents

How Do Freeriding Violations Occur?

Freeriding usually happens when investors act on the assumption that deposited funds or proceeds from trades are available immediately. In reality, both deposits and stock trades need time to settle.

One common trigger: unsettled deposits. When you transfer money into your brokerage account, the funds do not become “settled” right away. Most deposits take 3 to 5 business days to fully clear, depending on your bank and your broker’s processing time.

A freeriding violation occurs if:

❌ You use an uncleared deposit to buy a security.

❌ You sell that security before the deposit officially settles into your account.

❌ As a result, the purchase is covered using proceeds from the sale, not your own settled cash.

In this case, the brokerage flags the trade as freeriding because you never actually paid for the shares using your own funds.

📝 Note: You can use unsettled funds to buy a stock and hold it. A freeriding violation only occurs if you sell those shares before any sufficient settled funds have been deposited to cover the original purchase.

✏️ Hypothetical Example:

Suppose the following:

  • Monday: You deposit $10,000 into your brokerage account.
  • Without waiting for the deposit to settle, you use that $10,000 to buy shares of Stock A.
  • Wednesday: The bank rejects your deposit due to an error, and the funds are returned.
  • Thursday: You sell your Stock A shares for $12,000, gaining a $2,000 profit.

Because the original $10,000 deposit never cleared, your purchase of Stock A was never paid for with settled funds. Instead, your trade was funded by the proceeds of the sale itself, which violates Regulation T under the Federal Reserve Board.

This is a textbook freeriding violation. You bought and sold Stock A without ever using your own cleared money to fund the purchase.

Freeriding Violation vs. Good Faith Violation

Freeriding and good faith violations are easy to confuse, but they are not the same. The key difference lies in what kind of funds you used and when you sold the security.

Freeriding violation:

  • You buy shares using a deposit that has not yet settled.
  • You sell the same shares before the deposit clears.
  • You never had enough money in the account to cover the trade.

Good faith violation:

  • You use unsettled proceeds from a different stock sale to buy new shares.
  • You sell the new shares before the original sale (used to fund them) settles.
  • You had enough buying power at the time, but not enough settled cash.

As of 2025, the standard settlement for most U.S. stock trades now follow a T+1 settlement rule. This means the funds from a stock sale become “settled” one business day after the trade date. Any purchase using those proceeds is subject to this timing rule.

How to Avoid a Freeriding Violation

Freeriding is triggered by selling, not buying. You will not violate any rules simply by purchasing securities with unsettled funds as long as you hold the position and wait for funds to settle.

The issue arises only when you sell the security before having enough settled cash to cover the original purchase. To avoid triggering a freeriding violation, you must make sure your buy order is fully funded before you sell the security you just purchased.

Ways to prevent a freeriding violation:

✅ Use only settled cash when placing a buy order.

✅ Wait for deposits to clear before initiating a trade.

✅ Avoid selling newly purchased securities until you are sure your account has sufficient settled funds.

✅ If your broker shows settled vs. unsettled balances, monitor the settled cash amount, not your total cash or buying power.

Penalties for Freeriding Violations

Even one freeriding violation in a 12-month period can result in a trading restriction on your account. Under Regulation T, a single violation is enough to trigger an immediate 90-day freeze.

During this restriction:

  • You may place trades only with fully paid cash available in your account on the trade date.
  • You will not be allowed to use unsettled funds or proceeds from recent trades until they clear.

In contrast, good faith violations do not carry a federal penalty schedule. Enforcement is handled at the broker-dealer level, and the rules vary by firm.

Broker-dealer responses to good faith violations often include:

  • Issuing warnings after the first or second violation.
  • Imposing a 90-day settled-cash-only restriction after multiple violations.
  • Limiting trading features, such as disabling instant buying power.

📝 Note: Many brokerage firms apply similar restrictions to both freeriding and good faith violations. The key difference is that freeriding restrictions are mandatory under federal regulation, while good faith penalties are set by the firm’s internal policies.

Final Thoughts

Freeriding violations can catch investors off guard, especially when trades move faster than the cash behind them. Selling before your funds have settled can lead to a 90-day restriction that limits your ability to trade freely. 

To avoid this, make sure your account has enough settled cash to cover each purchase before placing a sell order. Pay close attention to settlement timing to keep your account in good standing and your trading activity uninterrupted.

Disclaimer:

The Carry Learning Center is operated by The Vibes Company Inc. (“Vibes”) and contains generalized educational content about personal finance topics. While Vibes provides educational content and technology services, all investment advisory services discussed on this website are provided exclusively through its wholly-owned subsidiary, Carry Advisors LLC (“Carry Advisors”), an SEC registered investment adviser. The information contained on the Carry Learning Center should not be construed as personalized investment advice and should not be considered as a solicitation to buy or sell any security or engage in a particular investment, accounting, tax or legal strategy. Vibes is not providing tax, legal, accounting, or investment advice. You should consult with qualified tax, legal, accounting, and investment professionals regarding your specific situation.

The accounts, strategies and/or investments discussed in this material may not be suitable for all investors. All investments involve the risk of loss, and past performance does not guarantee future results. Investment growth or profit is never a guarantee. All statements and opinions included on the Carry Learning Center are intended to be current as of the date of publication but are subject to change without notice.
To access investment advisory services through Carry Advisors, you must be a client of Vibes on an eligible membership plan. For more information about Carry Advisors’ investment advisory services, please see our Form ADV Part 2A brochure and Form CRS or through the SEC’s website at www.adviserinfo.sec.gov.