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Trading FAQs: Trading Restrictions

Cash account trading and free ride restrictions

  • What is a cash account?

    A cash account is defined as a brokerage account that does not allow for any extension of credit on securities. This includes retirement accounts and other non-retirement accounts that have not been approved for margin. While customers may purchase and sell securities with a cash account, trades are only accepted on the basis of receiving full payment in cash for purchases and good delivery of securities for sales by the trade settlement date.

    If a cash account customer is approved for options trading, the customer may also purchase options, write covered calls, and cash covered puts.

    Short selling, uncovered option writing, option spreads, and pattern day-trading strategies all require extension of credit under the terms of a margin account and such transactions are not permitted in a cash account.

  • What are the rules surrounding cash account trade settlements?

    Rules for payment of securities transactions executed in accounts are established under Federal Reserve Board Regulation T. Under these guidelines, purchases in cash accounts can be accepted under the following conditions: if there are sufficient funds in the account to fully pay for the purchase  at the time the trade is executed or the customer makes a good faith agreement to promptly make full payment for the purchase on or before the settlement date and before selling the security.

    Settlement date may vary by security type and conditions of the trade but is generally three business days for equities and one business day for options and most mutual funds. Fixed income security settlement will vary based on security type and new issue versus secondary market trading.

    It is important to note that the definition of sufficient funds in a cash account does not include cash account proceeds from the sale of a security that has not settled. It also does not include non-core account money market positions.

  • What are possible cash account violations?

    A good faith violation occurs when a security purchased in a customer's cash account is sold before being paid for with the settled funds in the account. This is referred to as a "good faith violation" because while trade activity gives the appearance that sales proceeds will be used to cover purchases (where sufficient settled cash to cover these purchases is not already in the account), the fact is the position has been liquidated before it was ever paid for with settled funds, and a good faith effort to deposit additional cash into the account will not happen.

    Good faith violation example 1:
    Cash available to trade = $0.00

    • On Monday morning, a customer sells XYZ stock netting $10,000 in cash account proceeds.
    • On Monday afternoon, the customer buys ABC stock for $10,000.
    • If the customer sells ABC stock prior to Thursday (the settlement date of the XYZ sale), the transaction would be deemed to be a good faith violation because ABC stock was sold before the account had sufficient funds to fully pay for the purchase.

    Good faith violation example 2:
    Cash available to trade = $10,000, all of which is settled

    • On Monday morning, the customer purchases $10,000 of XYZ stock.
    • On Monday mid-day, the customer sells the XYZ stock for $10,500.
    • At this point, no good faith violation has occurred because the customer had sufficient funds (i.e. settled cash) for the purchase of XYZ stock at the time the purchase was made.
    • Near market close, the customer purchases $10,500 of ABC stock.
    • A good faith violation will occur if the customer sells the ABC stock prior to Thursday when Monday's sale of XYZ stock settles and the proceeds of that sale are available to fully pay for the purchase of ABC stock.

    Good faith violation example 3:
    Cash available to trade = $15,000, of which $5,000 is from an unsettled sell order from Friday that is due to settle on Wednesday.

    • On Monday morning, the customer purchases $15,000 of ABC stock.
    • The purchase is not considered fully paid for because the $5,000 in proceeds from the sale of stock from the previous Friday will not settle until Wednesday.
    • A good faith violation will occur if the customer sells the ABC stock prior to Wednesday.

    A cash liquidation violation occurs when a customer purchases securities and the cost of those securities is covered after the purchase date by the sale of other fully paid securities in the cash account.

    Cash liquidation violation example 1:
    Cash available to trade = $0.00

    • On Monday, the customer purchases $10,000 of ABC stock.
    • On Tuesday, the customer sells XYZ stock, which had been purchased the previous month, for $12,500 in proceeds (due to settle on Friday).
    • A cash liquidation violation has occurred because the customer purchased ABC stock by selling other securities after the purchase. When the ABC transaction settles on Thursday, the customer's cash account will not have the sufficient settled cash to fund the purchase because the sale of the XYZ stock will not settle until Friday.

    A free riding violation occurs when a customer purchases securities and then pays for the cost of those securities by selling the very same securities.

    Free riding example 1:
    Cash available to trade = $0.00

    • On Monday morning, the customer places an order to purchase $10,000 of ABC stock through a representative on a good faith agreement of prompt payment by settlement date (Thursday).
    • No payment is received by settlement on Thursday.
    • On Friday, the customer sells ABC stock for $10,500

    A free riding violation has occurred because no payment was received for the purchase.

    Free riding example 2:
    Cash available to trade = $5,000

    • On Monday morning the customer places an order to purchase $10,000 of ABC stock intending to send $5,000 payment later in the week (before Thursday) through an electronic funds transfer.
    • On Tuesday, ABC stock rises dramatically in value due to rumors of a takeover.
    • On Wednesday morning, the customer sells ABC stock for $15,000 and decides it is no longer necessary to send the $5,000 payment.
    • On Thursday, the customer does not complete the electronic funds transfer.
    • A free riding violation has occurred because the $10,000 purchase of ABC stock was paid for, in part, with the sale of ABC stock since the customer did not deposit into the account the additional $5,000 to cover the purchase price of ABC stock by settlement date.

    A cash account with three good faith violations, three cash liquidation violations or one free riding violation in a 12-month period will be restricted to purchasing securities only when the customer has sufficient settled cash in the cash account at the time of purchase. This restriction is effective for 90 calendar days.

  • What is my balance for cash available to trade?

    Cash available to trade is defined as the cash dollar amount available for trading in the core account without adding money to the account. This balance includes intraday transaction activity.

    For unrestricted cash accounts, all buy trades are debited and all sell trades are credited from the cash available to trade balance as soon as the trade executes, not when the trade settles. For example, if the core is $10,000, a deposit of $10,000 is received today, and the account has a $10,000 credit balance from unsettled activity, the cash available to trade balance would be $30,000.

    For cash accounts restricted for free riding or good faith violations, the cash available to trade balance will not include unsettled cash account sale proceeds.

Day trading

  • What is day trading?

    Day trading is defined as buying and selling the same security (or executing a short sale and then buying the same security) during the same business day in a margin account. “Pattern day traders,” as defined by FINRA (Financial Industry Regulatory Authority) rules, must adhere to specific guidelines for minimum equity and meeting day trade margin calls.

  • What is a pattern day trader?

    The term "pattern day trader" generally means any customer who:

    • Executes four or more day trades within a five-business-day period, or
    • Incurs two unmet day trade calls within a 90-day period.

    A non-pattern day trader account, or an account with only occasional day trading, becomes designated a pattern day trader if it meets either of the above criteria. To remove the pattern day trader status on an account, the account must not have any day trades for 60 consecutive days.

    • Minimum equity requirements for pattern day traders
      Pattern day traders must maintain a minimum equity of $25,000 in their margin account at all times or the account will be issued a day trade minimum equity call. Non-marginable securities such as mutual funds that haven't been held for 30 days and options are not counted toward margin equity.
    • For day traders not classified as pattern day traders, the requirement is the minimum margin equity of $2,000 required by all Fidelity brokerage accounts.
    • Day trade minimum equity call
      A day trade minimum equity call occurs when the margin account equity in a pattern day trader account falls below $25,000. This minimum must be restored within five business days with a deposit of cash or marginable securities. If the day trade minimum equity call is not met, then the account's day trading buying power will be restricted for 90 days. Note that there is a two-business-day holding period on funds deposited to meet a day trade minimum equity call or a day trade call.
    • Day trade buying power
      Day trade buying power is the amount that a customer can day trade without incurring a day trade call.

      The rules generally permit a pattern day trader to trade up to four times the minimum margin excess (also referred to as "exchange surplus") in the account using time and tick and as of the close of business of the previous day. Time and tick calculates margin using each trade in the sequence that it is executed, using the highest open position during the day. This information is only available to eligible day traders on Fidelity.com or Active Trader Pro®.

    • Note: Money market and cash credit balances are not included in the calculation of exchange surplus and, consequently, do not factor into day trade buying power.
      • Example:
        Your account has $20,000 more than the minimum equity requirement for the marginable equities you hold. As a result, your day trade buying power is $80,000 (four times the exchange surplus).
      • If you bought $80,000 of XYZ Corp. at 9:31 a.m. and bought $70,000 of JGG Ind. at 10:00 a.m., then subsequently sold XYZ and JGG, a day trade margin call would be issued the next business day. (One way to avoid the margin call in this example would be to sell XYZ Corp. before purchasing JGG Ind.).
    • The account's day trade buying power balance has a different purpose than the account's buying power value. If you are intending to day trade, then the day's limits are prescribed in the day trade buying power field. If you do not plan to trade in and out of the same security, in the same day, then use the buying power field to track the relevant value.
  • What is the difference between a pattern day trader and a non-pattern day trader?
      Pattern day trader Non-pattern day trader
    Definition
    • An account with 4 or more day trades within a 5-day period, or
    • An account with 2 unmet day trade calls within 90 days
    • Occasional day trading
    Minimum equity $25,000 at all times $2,000
    Buying power If the account is…
    • Unrestricted: 4 times exchange surplus (with time and tick)
    • In a day trade call: 2 times exchange surplus (without the use of time and tick)
    • Restricted or in a day trade minimum equity call: 1 times the exchange surplus (without the use of time and tick)
    If the account is…
    • Unrestricted: 4 times exchange surplus (with time and tick)
    • In a day trade call: 4 times exchange surplus (with time and tick)
    • Restricted: n/a
    Call trigger: day trade call

    A day trade that exceeds the account’s day trade buying power

    A day trade that exceeds the account’s day trade buying power

    Call trigger: day trade minimum equity call

    Margin equity falls below the $25,000 pattern day trader equity requirement.

    n/a

    Call meeting method

    Deposit of cash or marginable securities within 5 business days. A sell of an existing position may satisfy a day trade call but is considered a day trade liquidation. Three day trade liquidations within a 12-month period will cause the account to be restricted.

    Deposit of cash or marginable securities within 5 business days. A sell of an existing position may satisfy a day trade call but is considered a day trade liquidation. Three day trade liquidations within a 12-month period will cause the account to be restricted.

    Result of unmet call

    Account is restricted and buying power is reduced for 90 days.

    If day trades are not placed for 60 days, account will no longer be labeled pattern day trader.

    Labeled a pattern day trader if 2 day trade calls are not met within 90 days.
  • What is a day trade call?

    A day trade call is generated whenever opening trades exceed the account’s day trade buying power and are closed on the same day. Customers have five business days to meet a call in an unrestricted account by depositing cash or marginable securities in the account.

    The sale of an existing position may satisfy a day trade call but is considered a day trade liquidation. Three day trade liquidations within a 12-month period will cause the account to be restricted. If funds are deposited to meet a day trade call, there is a minimum two-day hold period on those funds in order to consider the call met. Adding additional days for money movement times may be necessary.

    Any distributions or checks written out of the account during the open day trade call period will increase the call dollar for dollar. If a day trade call of a pattern day trader is not met by the due date, the account is restricted.

    Account restrictions if a call is unmet
    This reduces the leverage of the day trade buying power for 90 days to one times the exchange surplus without the use of time and tick.

  • How do I find my pattern day trader balance?

    The Balances page provides account information, including day trade buying power and margin call information, to assist with monitoring your account. This information is only available to accounts classified as pattern day trader.

    Additionally, you can view margin restrictions and detailed day trade information such as your day trade designation and number of day trade liquidations in the past 12 months—along with Help links—to better understand how they impact your margin trading.

    If you are eligible, you will see your intraday buying power displayed along with your regular margin buying power information. If a margin call is issued on your account, the Balances page displays the type and amount, and provides links to additional details on the Margin Call Summary page.

    If you are not a day trader, the Margin Buying Power field on the Balances page (not the Day Trade Buying Power value) provides you with key account information.

Questions?

More Information

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Time and Tick

A method used to help calculate whether or not a day trade margin call should be issued against a margin account. With this method, only open positions are used to calculate a day trade margin call.

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Settlement Times by Security Type

Investment type Purchase settlement period1, 2 Sales settlement period1, 2 Exceptions
Listed equities3 3 business days 3 business days  
OTC (over the counter)3 3 business days 3 business days  
Options 1 business day 1 business day  
Fidelity money market funds Same day Same day  
Fidelity bond funds 1 business day 1 business day  
Fidelity equity funds 1 business day 1 business day  
Non-Fidelity funds4 Varies Varies Depends on fund family, usually 1–3 days. Next-day settlement for exchanges within same families. Funds cannot be sold until after settlement.
Municipal bonds 3 business days 3 business days New issues may take 1–3 weeks
Corporate bonds and zeros 3 business days 3 business days  
Unit investment trusts 3 business days 3 business days  
Mortgage securities4 Varies Varies Depends on the time of the month the trade is placed
U.S. Treasuries and zeros 1 business day 1 business day Except for auction orders, which may take longer
Agency bonds 1 business day 1 business day
Certificates of deposit Wednesday of the following trade week 3 business days
Precious metals 2 business days 2 business days
Note: Some security types listed in the table may not be traded online.
1. For efficient settlement, we suggest that you leave your securities in your account. Brokerage regulations may require us to close out trades that are not settled promptly, and any losses that may occur are your responsibility. There is a $15 Late Payment Fee. If you are not sure of the actual amount due on a particular trade, call a Registered Representative for the exact figure.
2. Saturdays, Sundays, and stock exchange holidays are not business days and therefore cannot be settlement days. Exchanges are sometimes open during bank holidays, and settlements typically are not made on those days.
3. When you place a trade for all shares in a stock, we liquidate the fractional shares at the same execution price on the settlement date. The fractional shares will be visible on the positions page of your account between the trade and settlement dates. We do not charge a commission for selling fractional shares.
4. Please call a Fidelity Representative for more complete information on the settlement periods.