A good faith violation (GFV) happens when you buy a stock and sell it before paying for the initial purchase with settled funds. This is because no good faith effort was made to deposit additional cash into the account before the settlement date.
- Chris sells XYZ stock and nets $10,000 in cash account proceeds during the morning trade window on Monday.
- He uses that cash to purchase ABC in the same trading window.
- On Tuesday, Chris sells ABC before his initial sale of XYZ has settled (T+2).
Chris needed to wait until his sale of XYZ settled on Wednesday before he could have sold ABC without a GFV.
Who is impacted by good faith violations?
Anyone with an M1 cash account can be impacted by GFVs. On M1, this includes:
- Brokerage accounts
- Retirement accounts like traditional and Roth IRAs
A 90-day restriction will come after your fourth GFV.
You may need to contact M1 directly to trade, so you don't receive your fifth violation. We do this to minimize any risk that you hit your fifth GFV, which would cause additional restrictions.
A fifth GFV will cause a 90-day restriction from all trading.