When you sell shares, the money you make shows in your Hatch account once the order has been completed. Behind the scenes, it takes two full US business days for the ‘actual’ money to change hands. During this time, the money you’ve received from the sale is considered ‘unsettled’.
You can buy shares using unsettled money straight away, but, if you sell those shares within two US business days (before the money you used to buy them settles), it’s considered a ‘good faith violation’. This is because you’re selling shares (and maybe making a profit) from money you don’t actually have yet.
If you get a good faith violation, you’ll receive a warning in Hatch.
How bad is a good faith violation?
We won’t tell your parents, but you should probably avoid them.
Accounts with three good faith violations within a 12-month period will be restricted to buying shares with money that has settled. This restriction lasts for 90 days and then the restriction will be lifted - and we can’t remove the restriction early.
You can still buy and sell shares, but restricted accounts can no longer buy shares using unsettled money. You'll have to wait two US business days after each sale before you can use the money you made to buy more shares.
Note: If you already own shares in a particular company or ETF and then buy shares with unsettled money, then all your shares in that company or ETF will be classed as unsettled for 2 US business days.
How do I avoid a good faith violation?
An easy way to avoid any issues is to always wait at least two US business days after you buy shares before you sell them. A ‘business day’ is a day that the NYSE and Nasdaq are open.
Here are some examples of when a good faith violation is triggered
On Monday morning, an investor sells Y shares for $5,000.
On Monday afternoon, the investor buys X shares for $5,000.
If the X shares are sold before Wednesday (settlement date of the Y sale), it would be a good faith violation. This is because the X shares were bought using money made from the sale of Y shares, and sold before the Y share sale has settled.
Available balance to invest = $15,000 ($5,000 is unsettled from a sale of shares on Saturday morning NZT, which will settle on Wednesday morning NZT)
On Tuesday morning, the investor purchases $15,000 of Y shares
If the investor sells the Y shares on Tuesday (same day), they will trigger a good faith violation because $5,000 of the money they used to buy the shares hadn’t settled yet (settling on Wednesday)
Available balance to invest = $5,000 (unsettled from a sale of shares on Saturday NZT, which will settle on Wednesday NZT)
The investor has an existing 100 shares in Y company
On Tuesday morning, the investor purchases 50 more shares of Y shares with the unsettled $5,000
If the investor then sells 10 Y shares on Tuesday, they will have a good faith violation because the whole Y position of 150 shares will be classed as unsettled until Wednesday