Series 7: 14.4.1 Cash Accounts

14.4.1  Cash Accounts

In a cash account, the investor must pay the full amount for the securities he purchases. Securities traders must pay for purchased securities by the regular way settlement date (T + 2), and the securities cannot be sold again until the payment has been made.

According to Regulation T, customers have two additional business days to make good on their payments. If a customer does not come up with payment by the end of T + 4 at the latest, the broker-dealer will close out the position and freeze the customer’s account.

Freeriding is the prohibited practice of buying securities in a cash account and selling them on or before the settlement date to make the payment. Without enough cash in the account to cover the initial purchase, the trader is relying on his broker for credit and attempting to trade for free. You need a margin account if you expect credit from your broker.

Typically, if a customer is guilty of freeriding, the sell order will go through, but the account will then be frozen for the next 90 days to prevent further freeriding. During this 90-day period, the