What is a good faith violation?

A good faith violation occurs when a security that is purchased in a cash account is sold before being paid for with settled funds in the account. While it appears that sales proceeds will be used to cover purchases, the position is liquidated before it was ever paid for using settled funds.

As an example, you sell $5,000 in XYZ on Monday and buy $5,000 ABC later that afternoon with the proceeds of sale. If you sell ABC before Thursday (the settlement date for your XYZ trade), you will have incurred a good faith violation.

As another example, you have $5,000 in settled cash in your Kapitall account and purchase $5,000 XYZ stock on Monday. Later that day, you sell XYZ for $6,000 and use these funds to purchase ABC on Tuesday. A good faith violation will occur if you sell ABC before Friday (the settlement date for your ABC trade).

An account with too many good faith violations in a rolling 1 year period will be restricted for 90 days. Under this restriction, you can still trade, but you'll need to pay for purchases in full. Note that since you'll still be able to trade, it's possible to incur another good faith violation while under this restriction. If you incur another good faith violation while restricted, you will be further restricted to liquidating trades only in your account for an additional 90 days.

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