RiskPicksWhat is a Good Faith Violation?
A good faith violation (GFV) occurs in a cash account when you buy a security using unsettled proceeds from a prior sale, and then sell that new security before the original proceeds have settled. In other words, you used money you did not technically have yet and then locked in that use by selling before it settled.
Example
- Monday: you sell Stock A for $1,000. The cash will settle on Tuesday (T+1)
- Monday: you immediately use that unsettled $1,000 to buy Stock B
- Monday: you sell Stock B the same day
This is a good faith violation because you sold Stock B before the cash from Stock A settled. You were trading with money that was not yet yours.
Consequences
- First and second violation: your broker warns you but takes no action
- Third violation in 12 months: your account is restricted to trading only with settled cash for 90 days. This effectively limits you to one trade per day
How to avoid GFVs
- Use a margin account: margin accounts do not have good faith violations because your broker extends credit against unsettled funds. This is the simplest fix
- Wait for settlement: in a cash account, wait one business day after selling before using those proceeds to buy and sell again
- Track your settled vs unsettled cash: most brokers show this in your account details
Good faith violations only apply to cash accounts. If you are trading actively and hitting GFVs, upgrading to a margin account eliminates the problem entirely. You do not have to use margin (borrowed money) just because you have a margin account.