Understanding Stock Settlement Dates & Violations

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Narrator: Though trading with cash in a brokerage account is generally straightforward, it might not be obvious when you'll have full access to the cash after selling a stock or when you could use those proceeds to place other trades.

Let's say you sell $5,000 worth of stock. But the next day, when you look at your Funds Available…To Withdraw section, the balance hasn't been updated. What's going on?

When you buy or sell an equity like a stock, the date of transaction—or when your order is filled—isn't the same date as what's called the "settlement date." This is when the buyer gets the shares, and the seller gets the money.

In fact, it takes two trading days for equity trades to settle.

This means if you sold a stock on Monday, you wouldn't receive the cash until Wednesday.

Or, if you sold your shares on Friday, you wouldn't receive the cash until Tuesday when the trade settles.

Understanding the two-day lag time between transaction and settlement can help you distinguish between settled and unsettled cash.

In this video, we'll discuss the different rules around trading with settled versus unsettled cash and how to avoid violating rules around trading with unsettled funds in cash accounts.

In a cash account, settled cash includes incoming cash from deposits and transfers—even if they haven't cleared yet—and the proceeds from trades that have already settled (meaning, they occurred at least two trading days ago). When you buy stock or other securities with settled cash in a cash account, there aren't any restrictions around when and how you close that position.

Unsettled cash is proceeds from securities you've sold, though that cash hasn't been transferred to your account yet.

While you can trade with unsettled cash, there are certain restrictions you need to be aware of.

For example, you can use the unsettled proceeds from a previous sale to make new purchases. But there are restrictions around when you can sell a security you've purchased with unsettled funds.

A good faith violation occurs when you sell a security, use those unsettled funds to buy another security, and then sell that security before the first sale settles.

For example, let's say you have a cash account and own $10,000 worth of a stock outright. On Monday, you sell those shares and now have $10,000 of unsettled cash in your account until the trade settles on Wednesday.

On Tuesday morning, you use your $10,000 in unsettled cash to buy another stock. This stock's price begins to quickly climb, and by that afternoon, you realize you can sell those shares for $12,000, so you decide to sell your entire position.

This is a "good faith violation" because the sale of your first stock was not settled. To avoid a good faith violation in this instance, you'd have to hold on to your new stock shares until Wednesday—this is the day your funds from the previous trade would settle and you'd be able to sell your new stock.

If you commit a good faith violation, you'll be notified with a secure message.

If you commit three good faith violations during a 12-month period, you'll be restricted to trading using only settled cash for 90 days. This means you won't be able to use the proceeds from a sale to make an additional purchase until that trade settles, which takes two trading days.

You can find out how much you have in settled funds by logging in to your account at schwab.com and selecting the Balances page.

Here, you'll see your Funds Available…To Withdraw Cash & Cash Investments balance. This does not include funds from unsettled trades, funds applied to open orders, or cash from deposits that haven't cleared yet. The easiest way to avoid settlement violations is to not place buy orders that exceed this amount.

If you want to check your cash available for withdrawal on the Schwab Mobile app, you can do that too by logging in and navigating to the Balances tab.

Another way to avoid a cash settlement violation is to apply for a margin account.

In a margin account, you have the flexibility to place trades with unsettled funds without incurring interest, and you don't have to worry as much about settlement dates.

Margin isn't suitable for everyone, though, and is not available in all account types. Margin trading increases risk of loss and includes the possibility of a forced sale if account equity drops below required levels. Regardless of which type of account you use, make sure you understand when your trades settle and monitor them closely.

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