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What is freeriding?

You can reinvest the proceeds from selling stock as long as you have paid for the security or have enough cash in your account for it, otherwise you will be in a freeriding violation, which happens when you sell a stock that was purchased with unsettled funds.

The following example illustrates freeriding:

An investor holds US$ 10,000 of fully paid for and settled ABC stock in a cash account. The investor does not hold any additional cash or securities in the cash account. The investor sells all the ABC stock on Monday and buys US$ 10,000 worth of XYZ stock on the same day. On Tuesday, the investor sells all of the XYZ stock without adding any additional cash to the account. The settlement date on the sale of the ABC stock that the investor used to pay for the purchase of the XYZ stock would be Wednesday (two business days after the date of the sale).

Since the investor used the proceeds from the sale of securities that has not settled yet, to purchase the XYZ stock, the investor can’t sell the XYZ stock prior to Wednesday without adding additional cash to the account to cover the purchase price of the XYZ stock. Since the investor sold the XYZ stock on Tuesday without adding any additional cash to the account, the investor’s actions constitute freeriding.

Freeriding is not permitted under Regulation T, and we may be required to “freeze” your account for 90 days. During this period, you may still purchase securities with the cash account, but must fully pay for any purchase on the date of the trade.

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