If a security purchased in your account is sold before you've paid for it with settled funds in the account, a good faith violation has occurred. The reason it is called a good faith violation is that your trade activity indicates that you will not make a good faith effort to deposit additional cash into your account.
Accounts with three good faith violations in a 12-month period will be restricted to purchasing securities with settled cash only for a period of 12 months.
Good faith violation example 1:
Cash available to trade = $0.00
- On Monday morning, a customer sells Apple (APPL) stock for $5,000
- On Monday afternoon, the customer buys Facebook (FB) stock for $5,000.
- If the Facebook stock is sold before the money from Apple sale has settled, a good faith violation would be charged as the Facebook stock is not considered fully paid for prior to sale.
Good faith violation example 2:
Settled cash = $5,000
- On Monday morning, a purchase is made for $5,000 of Shopify (SHOP) stock.
- On Monday mid-day, the customer sells the Shopify stock for $5,500.
- Near market close, the customer purchases $5,500 of Walmart (WMT) stock.
- At this point no good faith violation has occurred because the customer had sufficient funds for the purchase of Shopify.
- If Walmart is sold before it's been paid for (settlement of Shopify sale) then a good faith violation will have occurred.
Good faith violation example 3:
Cash available to trade = $10,000; Unsettled cash = $5,000 (proceeds from a sale of stock on the prior Friday – trade settles on Tuesday)
- On Monday morning, customer purchases $15,000 of Chevron stock.
- A good faith violation occurs if this customer sells the Chevron stock on Monday.
- The purchase is not considered fully paid for because the $5,000 proceeds are not considered sufficient funds until they are settled on Tuesday.