Free Riding Violation in a cash account, an investor must pay for the purchase of a security before selling it. If an investor buys and sells a security before paying for it, the investor is “freeriding” which is not permitted.

Example 1:

1. JB Hi-Five has $2,000 settled cash available to trade.

2. On Monday morning, JB buys $4,000 of AMZN stock.

3. On Tuesday, AMZN rises 20% and JB sells out of $4,800 of shares.

4. JB Never posts the remaining $2,000 of cash to pay for the AMZN purchase.

5. JB has incurred a free riding violation, as JB did not pay for the AMZN shares in full before selling it.


See details provided by the SEC here.