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 2 full 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 that unsettled money straight away without any problems. However, if you sell those shares within 2 full 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 ‘have’ yet.
If you commit a Good Faith Violation, you’ll receive a warning in the app after the order is placed. After three Good Faith Violations, your account will be restricted until one of the GFVs expire (they expire after 12 months).
Restricted accounts can no longer buy shares using unsettled money, so you'll have to wait 2 business days after each sale before you can use the proceeds of the sale to invest in new shares.
Good faith violation example 1:
- 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 2:
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 3:
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
An easy way to avoid any issues is to always wait at least 2 working days after you buy shares before you sell them.