Examples of Good Faith Violations
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Typical Stock Trade
- If you purchase 100 shares of a security on Wednesday for $1,000, you would need to have $1,000 cash in your account to pay for the trade on the settlement date (typically T+1 for most securities).
- If you do not have sufficient cash to cover the trade and sell the shares before the settlement date, this results in a Good Faith Violation.
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Reusing Proceeds Before Settlement
- If you have $0 available cash and on Tuesday, you sell ABC stock for $5,000, then later that day you purchase DEF stock for $5,000, the sale proceeds of ABC stock will not settle until Wednesday (T+1).
- If you sell DEF stock before Wednesday, this results in a Good Faith Violation because the purchase of DEF stock wasn’t paid for with settled funds.
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Selling a Portfolio After Rebalancing
- If a portfolio you copied rebalanced on the same day and you attempt to sell or liquidate it, the sale of the securities in the rebalance may not have settled yet.
- Selling the portfolio on the same day would result in a Good Faith Violation because the funds from the rebalance have not yet settled to pay for the purchases.
How to Avoid Good Faith Violations
- Ensure you have sufficient settled cash in your account before placing a trade.
- Avoid selling securities or portfolios before the settlement date.
- Plan trades and portfolio liquidations carefully, especially if a rebalance has occurred.
Help us prevent Good Faith Violations. dub appreciates your efforts!
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