Under Regulation T of the Securities and Exchange Act of 1934, all transactions in a cash account must be paid for in full.
This means, if you BUY a security with settled funds in your cash (retirement type) account you may SELL that security at any time without restriction. If you BUY a security in your cash account with insufficient funds or unsettled funds you must hold that security until the purchase is fully paid for with either a new deposit or the settlement date is reached for the funds used.
Equity trades settle 3 business days following the trade date (T+3). Option trades settle 1 business day following the trade date (T+1). The cash released from a SELL, in a cash account, are considered “unsettled” for a period of 3 business days following the trade date. However, a trader may re-use the unsettled sale cash to purchase another security prior to the settlement date of those funds. But, in doing so, he/she agrees to hold the new purchase at least until the funds from the original sale settle.
If you sell the security that was purchased all or in part with unsettled funds prior to those funds settling it will be considered a violation of SEC rules and your account will be restricted for a period of 90 days. During that time you must place your trades over the phone with a live broker.
The original theory for this rule is that a customer who sells securities prior to paying for them in a cash account (either with a new depositor settled funds from a prior sale) has received an extension of credit. Credit transactions must be executed in a Margin account.
ALWAYS FOLLOW THE RULES
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