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.
To avoid good faith violations, please do not sell any stock from which you have bought some shares with unsettled cash until after 1 full business day has passed and the cash is settled.
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 90 days.
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 Monday)
On Monday morning, customer purchases $15,000 of Chevron stock.
A good faith violation occurs if this customer sells the Chevron stock on Monday morning before the stock market opens.
The purchase is not considered fully paid for because the $5,000 proceeds are not considered sufficient funds until they are settled on Monday when the stock market opens.
Please note: To also avoid good faith violations, please do not sell any position from a stock on which a purchase with unsettled cash was made, until after 1 full business day when the cash is settled. This affects previously purchased shares in that position including those bought with settled cash.
Good faith violation example 4:
Cash available to trade = $0.00
A customer has 3 Facebook shares bought with settled cash last month.
On Monday morning, the customer sells Apple (APPL) stock for $5,000.
On Monday afternoon, the customer buys 10 Facebook (FB) shares for $5,000, bringing his total number of Facebook shares to 13.
If any quantity of Facebook shares 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. For example, selling 1 Facebook share or 11 Facebook shares would result in a good faith violation.
Good faith violation example 5:
Imagine if you have unsettled cash of $100 and use the amount to buy 4 Apple shares, and then you buy another 3 Apple shares before making a third purchase of 2 additional Apple shares.
If you sell all 9 Apple shares in one single trade before the original $100 in unsettled cash is settled in your wallet, you would have made 3 good faith violations.