When a cash account is placed under a 90 Day Restriction, the account can only use settled funds to place a buy order. The following are some instances when an investor's account will be restricted:
When an account triggers a Good Faith Violation for the 4th time within 12 months.
When an investor makes day trades using unsettled funds:
For example: Nick had a $1,000 account balance in his cash account on Monday. He then bought $1,000 worth of ABC stock and sold it on the same day. Later that same day, Nick saw the price of ABC drop and decided to buy another $1,000 worth of ABC stock using the unsettled funds he had from selling ABC stock earlier. A 90 Day Restriction occurs.
To avoid this scenario, sale proceed from a day trade in a cash account will only be replenished to the buying power on the next business day.
When an investor sells securities that were not fully paid for by the settlement date:
For example: Jake has $1,000 in cash in his account, and he decided to place a market buy order on ABC stock on Monday. The market price inadvertently went up, and the order was executed at a higher price. Jake ended up buying $1,300 worth of ABC stock that was not fully paid for.
Since the trade was made through a cash account where no margin trading is allowed, Jake has to deposit the additional $300 before selling the security. If he sells this same position without fully paying for the security, his account will face a 90 Day Restriction.
To avoid this scenario, when purchasing stocks using market orders, the locked buying power is slightly marked up.