A Good Faith Violation (GFV) occurs when you purchase securities using unsettled funds and then sell those securities before the settlement date of the funds used for the original purchase. This type of violation is more common when day trading with a cash account.
For Example:
On Monday, you buy 100 shares of ABC stock and sell them the same day for $2,000. The proceeds from this sale will settle on Tuesday (T+1). However, on Monday, before the ABC sale proceeds settle, you decide to reinvest the $2,000 in XYZ stock and sell XYZ stock that same day. Since the proceeds from the ABC sale hadn’t settled yet when you sold XYZ, this transaction incurs a Good Faith Violation.
Restrictions:
Each GFV remains on your account for 12 months. Accumulating multiple GFVs within this period leads to increasing restrictions on your account:
2 Strikes: No change. You can still purchase securities using unsettled funds.
3 Strikes: You can only purchase securities using settled funds. You may apply for a Margin account (if eligible) to avoid further GFV strikes. (Note: Margin accounts are only available for non-IRA accounts.)
4 Strikes: Your account will be placed under a 90-calendar-day restriction. During this period, securities may only be purchased using settled funds. Broker-assisted trades will also be limited to using settled funds only.
5 Strikes: Your account will be restricted to liquidation only for 90 calendar days. You will not be able to apply for a Margin account, and any existing Margin privileges will be suspended during this time.