Free riding (also known as freeriding or free-riding) is a term used in stock trading to describe the practice of buying and selling shares or other securities without actually having the capital to cover the trade. In a cash account, a free riding violation occurs when the investor sells a stock that was purchased with unsettled funds. The Federal Reserve Board's Regulation T requires brokers to "freeze" accounts that commit freeriding violations for 90 days. Accounts with this restriction can still trade but cannot purchase stocks with unsettled sale proceeds (stocks take two days to settle). Freeriding can often be avoided by using a margin account. Trade Day + 2 Days In the United States, stocks take two business days to settle. If you buy a stock on a Monday, you do not have to pay for the purchase until Wednesday. This is known as trade day plus 2 days, or T+2. This two-day settlement period is considered an extension of credit from the broker to the customer. Because the transaction is considered a credit issue, the Federal Reserve is responsible for the rule, which is officially called Federal Reserve Board Regulation T. If a brokerage customer is approved for margin trading, there will be a line of credit to "cushion" the two day settlement period, but there is a limit on it. This credit allows customers to trade while the trade settles. A client in good faith agrees to make full payment of settled funds or to deposit securities within the two-day settlement period and to not sell the newly purchased stock before making such payment. For accounts without margin (aka "cash accounts"), traders who buy stock shares must have or deposit enough cash in the account on the day they are due (T+2) to pay for the purchases. Likewise, if a trader sells shares, the cash may be credited to their account balance immediately but the trade will not settle for two days. Any stock bought with this unsettled cash must be held until the cash is settled, funds are deposited, or margin is increased, to allow settling of the purchase before a sale. Free Riding Violation The Securities and Exchange Commission states "In a cash account, you must pay for the purchase of a stock before you can sell it. If you buy and sell a stock before paying for it, you are free riding, which violates