Free Riding Violation in a cash account, an investor must pay for the purchase of a security before selling it. If an investor buys and sells a security before paying for it, the investor is “freeriding” which is not permitted.

Example 1:

1. JB Hi-Five has $2,000 settled cash available to trade.

2. On Monday morning, JB buys $4,000 of AMZN stock.

3. On Tuesday, AMZN rises 20% and JB sells out of $4,800 of shares.

4. JB Never posts the remaining $2,000 of cash to pay for the AMZN purchase.

5. JB has incurred a free riding violation, as JB did not pay for the AMZN shares in full before selling it.


Consequences:

If you incur 1 Free Riding Violations in a 1 year period, your brokerage firm can restrict you account. For 90 days, you will be required to have the cash upfront before you can purchase more securities.

More Details See details provided by the SEC here.