Under SEC guidelines, a Good Faith Violation occurs when, through a cash account, a security is purchased and is sold before being paid for with settled funds in the account.

Traders using a cash account cannot sell a purchased stock if it was never paid for with settled funds. In essence, you can not sell out of a stock if you haven’t settled on the purchase - that is the position is liquidated before the cash used to pay for it settled.


Example 1

1. Moses Mentum sells $15,000 in QQQ on Monday morning (settling on Thursday)

2. He then proceeds to buy $14,000 of GOOG later that day with his sale proceeds of QQQ (also settling Thursday).

3. If Moses sells his GOOG stock before Thursday (the day his QQQ settles) he would have incurred a Good Faith Violation, as he has sold his stock before the funds he used to purchase it settled.