- Understand settlement: most U.S. equity trades settle T+2, which means proceeds aren't available until two business days after the trade date.
- A good-faith violation happens when you buy with unsettled proceeds and then sell that purchase before the original sale settles.
- Practical rule: use only "settled cash" to buy, or wait T+2 after a sale before selling the purchase made with that sale.
- Track two balances in your account: settled cash versus pending/unsettled proceeds; your broker's platform shows this.
- Three or more good-faith violations in a 12-month window can lead many brokers to restrict your account for 90 days, so plan trades to avoid patterns.
Introduction
Settlement for stock trades is the process that completes a trade, moving cash and ownership between buyer and seller. For most U.S. equities and many corporate bonds, settlement is T+2, which means the trade settles two business days after the trade date.
Why does this matter to you? Settlement timing determines when proceeds from a sale become available to buy again without risk of a good-faith violation. Do you ever wonder why your broker flags a trade even though you saw cash after a sale? In this article you'll learn what triggers good-faith violations, practical trade-sequencing rules to avoid them, and how to read the cash availability shown in your account.
Settlement Basics: How and when trades settle
Settlement means the buyer pays and the seller delivers the security. In the U.S. most equity trades follow T+2 settlement, implemented in September 2017. That means if you sell shares on Monday, the trade typically settles on Wednesday, assuming no holidays.
Business days matter. Weekends and market holidays do not count toward the T+2 clock. So a sale on Thursday typically settles the following Monday. Knowing business-day math helps you avoid using proceeds that aren't yet settled.
What is a Good-Faith Violation?
A good-faith violation happens when you buy a security using the proceeds of a sale that has not yet settled, and then sell that newly purchased security before the original sale settles. Regulators and broker firms see this as using unsettled funds to finance a trade that you liquidate prematurely.
Regulation and broker policies differ in wording, but here's the practical point: if you buy $TSLA using proceeds from a sale of $AAPL that hasn't settled, and you sell $TSLA before the $AAPL sale settles, that's a textbook good-faith violation. Brokers monitor this and may impose restrictions if it happens repeatedly.
Practical Rule Set: Trade sequencing and cash availability
Keep it simple with a few clear rules you can use every time you trade. These are designed for beginners and work across most broker platforms.
Rule 1: Use only settled cash to buy
Always check your account's settled cash balance before placing a buy order. If you want to avoid all good-faith risk, buy only with cash labeled "settled" by your broker. That balance represents funds you can legally use and then sell immediately without triggering a violation.
Rule 2: If you buy with proceeds, wait until the original sale settles before selling
If you choose to buy using proceeds from a recent sale, don't sell the new position until the original sale has settled. In practice, that means waiting T+2 business days after your sale, counting business days correctly.
Rule 3: Prefer deposits or margin when you need faster access
If you need to trade immediately after a sale, consider depositing cash or using a margin account. Deposited cash that clears is treated as settled; however, ACH or wire deposits typically take 1-5 business days to settle. Margin gives immediate buying power but brings interest and additional rules.
Rule 4: Monitor unsettled proceeds and placed orders
Use your broker's cleared/unsettled cash display to plan trades. Some brokers show "cash available" and "cash available after settlement." If you're unsure, call your broker or avoid using unsettled funds until they settle.
Rule 5: Avoid frequent buy-sell cycles with unsettled proceeds
Three or more good-faith violations within a 12-month period often leads many brokers to restrict your account for 90 days. To avoid that, keep a simple trade log and be conservative with sequencing until you fully understand your settled cash flow.
Checking Cash Availability and Tools
Your brokerage platform typically shows at least two cash numbers: settled cash and cash from recent sales that are unsettled. Learn where to find these numbers so you can plan trades without guesswork.
Use platform tools like order preview or buying power breakdowns. Some brokers label settled cash explicitly as "Available to trade" while listing unsettled proceeds separately. If the interface is confusing, take a few minutes to call support and ask them to explain where unsettled funds appear on screen.
Real-World Examples
Concrete scenarios make the rules easier to follow. All examples assume U.S. equities with T+2 settlement and no holidays.
Example 1: Safe sequence (no violation)
- Monday: You sell 100 shares of $AAPL for $150 each, proceeds $15,000. Those proceeds settle Wednesday.
- Tuesday: You buy $SPY for $15,000 using your settled cash balance from a prior deposit, not the $AAPL proceeds.
- Wednesday: $AAPL sale settles. You can now sell $SPY at any time without a good-faith violation because the purchase used settled cash.
Example 2: Unsafe sequence (triggers a good-faith violation)
- Monday: You sell $AAPL for $15,000, proceeds unsettled until Wednesday.
- Monday: You immediately buy $TSLA for $15,000 using the unsettled $AAPL proceeds shown as "cash available" on your platform.
- Tuesday: You sell $TSLA for a quick profit. Because the $AAPL sale hasn't settled yet, selling $TSLA before Wednesday creates a good-faith violation.
Example 3: Using deposits or margin to avoid delay
Thursday: You need to buy quickly but just sold a position Tuesday and the proceeds won't settle until Thursday. If you have a settled cash deposit or margin enabled, you can buy immediately without risk. Remember, margin carries interest and other rules, and deposited funds still need time to clear.
Common Mistakes to Avoid
- Assuming displayed cash is settled. Some brokers show estimated or provisional balances. Verify whether the balance is marked settled.
- Counting calendar days instead of business days. Weekend trades or holiday timing can push settlement later than you expect. Always count business days for T+2.
- Repeatedly using unsettled proceeds for quick flips. Multiple good-faith violations can lead many brokers to limit your buying capability for months.
- Relying on instant bank transfers. ACH or bank wires can take days to clear, so a deposit may not be usable immediately as settled cash.
- Not tracking your trade history. If you trade often, keep a simple log of trade dates and expected settlement dates so you don't get surprised.
FAQ
Q: What exactly counts as a good-faith violation?
A: A good-faith violation happens when you buy a security using proceeds from a sale that has not settled, and then sell the security you bought before the original sale settles. It’s about selling the newly purchased position prematurely while the funds used weren’t settled.
Q: How many violations can get my account restricted?
A: Broker policies vary, but many brokers will restrict buying with unsettled funds if you commit three or more good-faith violations within a 12-month period. That restriction often lasts 90 days, during which you can only trade with settled cash.
Q: Does T+2 apply to all securities and markets?
A: T+2 applies to most U.S. equities and corporate bonds. Some instruments, such as certain options, futures, or international securities, have different settlement cycles. Always check your broker’s specifications for each product.
Q: Can I avoid all this by using a margin account?
A: A margin account gives immediate buying power and avoids using unsettled proceeds, but it introduces interest fees and margin rules. Using margin is a valid strategy, but it changes your risk profile and is not the same as using settled cash.
Bottom Line
Settlement timing matters because it controls when you can safely reuse sale proceeds without creating a good-faith violation. For most U.S. stock trades, remember T+2, count business days, and always verify whether funds are settled before buying and selling the new position.
To avoid restrictions, follow the simple rules: buy with settled cash, wait T+2 if you used sale proceeds, and keep a careful eye on your account’s settled versus unsettled balances. With a little planning you'll trade confidently and avoid unnecessary account restrictions as you build your skills and portfolio.
