When you sell shares, the money you receive shows up in your Hatch account as soon as the order is completed. Behind the scenes, it takes two full US trading 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 that unsettled money straight away without any problems. However, if you sell those shares within two US trading 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 ‘have’ yet.
If you commit a Good Faith Violation, you’ll receive a warning in the app after the order is placed. Accounts with three good faith violations in a 12-month period will be restricted to purchasing shares with settled cash for a period of 90 days and then the restriction will be lifted.
Restricted accounts can no longer buy shares using unsettled money, so you'll have to wait two US trading days after each sale before you can use the proceeds of the sale to invest in new shares.
Please note that if you buy more shares with unsettled funds and add to a current position, the whole position will become classed as unsettled.
Good faith violation example one:
- 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.
Good faith violation example two:
Available balance (settled) = $5,000
- On Monday morning, an investor purchases $5,000 of X shares using their $5,000 available balance.
- On Monday mid-day, the investor sells the X shares for $5,500.
- Near market close, the investor purchases $5,500 of Y stock.
- At this point no good faith violation has occurred because the investor used their $5,000 settled available balance to buy the X shares
- If Y is sold before Wednesday (settlement date of the X sale), then a good faith violation will have occurred because the Y shares were bought with unsettled money from the X share sale.
Good faith violation example three:
Available balance = $15,000 ($5,000 is unsettled from a sale of shares on Friday, which will settle on Tuesday)
- On Monday morning, the investor purchases $15,000 of Y shares.
- If the investor sells the Y shares on Monday, they will have a good faith violation because $5,000 of the money they used to buy the shares isn't settled.
- If the investor sells the Y shares on Tuesday, they won't have a good faith violation because the $5,000 has now been settled
Good faith violation example four:
Available balance = $5,000 (unsettled from a sale of shares on Saturday, which will settle on Wednesday)
- 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
An easy way to avoid any issues is to always wait at least two US trading days after you buy shares before you sell them. A trading day are days that the NYSE Nasdaq are open for trading.