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Understanding Stock Settlement Dates and Avoiding Good Faith Violations - YouTube
Channel: TD Ameritrade
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Though trading with cash in a brokerage account
is generally straightforward, it might not
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be obvious when you'll have full access
to the cash after selling a stock, or when
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you can use those proceeds to place other
trades.
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Let's say you sell $5,000 worth of stock.
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But the next day, when you look at your Cash
available for withdrawal, the balance hasn't
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been updated.
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What's going on?
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When you buy or sell an equity like a stock,
the date of transaction or when your order
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is filled isn't the same date as what's
called the settlement date.
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This is when the buyer gets the shares and
the seller gets the money.
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In fact, it takes two trading days for equity
trades to settle.
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This means if you sold a stock on Monday,
you wouldn't receive the cash until Wednesday.
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Or, if you sold your shares on Friday, you
wouldn't receive the cash until Tuesday,
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when the trade settles.
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Understanding the two-day lag time between
transaction and settlement can help you distinguish
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between settled and unsettled cash.
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In this video, we'll discuss the different
rules around trading with settled versus unsettled
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cash, and how to avoid violating rules around
trading with unsettled funds in cash accounts.
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In a cash account, settled cash includes incoming
cash from deposits and transfers even if
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they haven't cleared yet and the proceeds
from trades that have already settled (meaning,
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they occurred at least two trading days ago).
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When you buy stock or other securities with
settled cash in a cash account, there aren't
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any restrictions around when and how you close
that position.
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Unsettled cash is proceeds from securities
you've sold, though that cash hasn't been
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transferred to your account yet.
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While you can trade with unsettled cash, there
are certain restrictions you need to be aware
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of.
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For example, you can use the unsettled proceeds
from a previous sale to make new purchases.
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But there are restrictions around when you
can sell a security you've purchased with
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unsettled funds.
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A good faith violation occurs when you sell
a security, use those unsettled funds to buy
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another security, and then sell that security
before the first sale settles.
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For example, let's say you have a cash account
and own $10,000 worth of a stock outright.
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On Monday, you sell those shares and now have
$10,000 of unsettled cash in your account
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until the trade settles on Wednesday.
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On Tuesday morning, you use your $10,000 in
unsettled cash to buy another stock.
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This stock's price begins to quickly climb,
and by that afternoon, you realize you can
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sell those shares for $12,000, so you decide
to sell your entire position.
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This is a good faith violation, because your
sale of your first stock was not settled.
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To avoid a good faith violation in this instance,
you'd have to hold on to your new stock
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shares until Wednesday this is the day your
funds from the previous trade would settle,
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and you'd be able to sell your new stock.
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If you commit a good faith violation, you'll
be notified with a secure message.
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If you commit three good faith violations
during a 12-month period, you'll be restricted
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to trading using only settled cash for 90
days.
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This means you won't be able to use the
proceeds from a sale to make an additional
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purchase until that trade settles, which takes
two trading days.
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You can find out how much you have in settled
funds by logging into your account at tdameritrade.com
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and selecting Balances.
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Here, you'll see your Cash available for
withdrawal.
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This does not include funds from unsettled
trades, funds applied to open orders, or cash
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from deposits that haven't cleared yet.
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The easiest way to avoid settlement violations
is to not place buy orders that exceed this
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amount.
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In the TD Ameritrade mobile app, you can find
your Cash available for withdrawal by navigating
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to Balances and selecting Details.
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Another way to avoid a cash settlement violation
is to apply for a margin account.
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In a margin account, you have the flexibility
to place trades with unsettled funds without
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incurring interest and you don't have to
worry as much about settlement dates.
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Margin isn't suitable for everyone, though,
and is not available in all account types.
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Margin trading increases risk of loss and
includes the possibility of a forced sale
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if account equity drops below required levels.
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Regardless of which type of account you use,
make sure you understand when your trades
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settle and monitor them closely.
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TD Ameritrade is where smart investors get
smarter.
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