Settlement is the delivery of stock against the full payment that must take place within three business days after the trade. You can sell the purchased stock before the settlement — daytraders do it all the time — provided that you do not violate the free ride rule.
The free ride rule stipulates that you cannot pay for a stock with the proceeds from its sale. That means that you must have sufficient funds in your account to pay for the stock before the broker releases the sales proceeds.
Cash brokerage accounts have a three-day settlement, which means that you must deposit enough cash to cover the stock within three business days from purchasing it. If you sell the stock before settlement, you still must deposit funds equal to the purchase amount before the broker will release the sales proceeds.
You must have sufficient margin funds in your account before you buy a stock. It may be cash, other marginable securities, or a combination of both. If you don’t have sufficient funds, you won’t be able to buy the stock, much less sell it, without paying.
Day Trading Account
A day trader may make dozens of trades on the same day, often in the same stock. Before he can do that, the broker must approve his account for day trading and the day trader must maintain a minimum $25,000 equity in the account at all times.
The broker may suspend or close your account if you repeatedly violate the free ride rule.
Free riding is a serious violation that is regulated by the Federal Reserve Bank through Regulations T and U and is enforced by the Securities and Exchange Commission.
Based in San Diego, Slav Fedorov started writing for online publications in 2007, specializing in stock trading. He has worked in financial services for more than 20 years, serving as a banker, financial planner and stockbroker. Now working as a professional trader, Fedorov is also the founder of a stock-picking company.