Freeriding: Definition, Examples and Penalties
Freeriding happens when someone buys a security with unsettled funds in the account and subsequently sells the security before fully paying for it. Please note that securities freeriding is a violation of the Federal Reserve Board’s Regulation T.
Freeriding example 1:
- Alan has $0 cash available to trade.
- On Tuesday morning, Alan buys $10 of ABC stock.
- No payment is received from Alan by Thursday’s settlement date.
- On Friday, Alan sells ABC stock for $18 to cover the cost of his purchase.
A freeriding violation occurs because Alan did not pay for the stock in full prior to selling it.
Freeriding example 2:
- Tony has $50 cash available to trade.
- On Monday morning, she buys $100 of XYZ stock with the intention of sending a $50 payment before Wednesday through an electronic funds transfer.
- On Monday after hours, XYZ stock rises dramatically in value due to higher than expected earnings.
- Later in the day on Tuesday, Tony sells XYZ stock for $150 and decides it is no longer necessary to send the $50 payment.
A freeriding violation has occurred because the $100 purchase of XYZ stock was paid for, in part, with proceeds from the sale of XYZ stock.
What’s the penalty for a freeriding violation?
If you incur a freeriding violation, your Stash account will be restricted to trade on settled funds for the next 90 calendar days. This means you will only be able to buy securities with settled cash in your account. Any incoming external ACH transfer you make will be considered settled after 3 banking days.
If you incur a second freeriding violation during the next 90 days while your account is restricted in accordance with the above, you will break the terms of Stash’s Advisory Agreement and your Stash account(s) will be permanently closed.
Related questions View all Tips & Guidance
Q. Everything you Need to Know about Dividends
A dividend is a payment to a shareholder when a company shares its profits. The amount of dividends you receive will be proportional to the amount of stock you own in that company. Dividends are usually paid in cash (not additional stock),…
Q. Why am I receiving an authentication code from Stash and how do I stop it?
Keeping your information secure is our top priority. Two-factor authentication (2FA) will send a confirmation code as a text/SMS message, email, or phone call. This helps protect your Stash account by requiring a security code in addition to your password when you log in. …
Q. Managing Your Stock-Back® Debit Card
Stash makes managing your Stock-Back® Debit Mastercard® easy. You can order a new card, activate your card, How can I order a new card? You can easily order a replacement Stock-Back® Card1 24/7 right from your Stash account.…
Didn’t find your question?
Tell us what you’re looking for, and we’ll search for resources that could help.Ask your question
Fiduciary 101: Why it’s Our Job to be Your Advocate
It’s a big word that means a lot when it comes to handling your money. It defines a relationship built on trust and duty.