The truth is sometimes, stock market terms can feel like another language.
You’re just trying to buy and sell shares, then boom you get a scary notification that says, “You’ve committed a Good Faith Violation.”
You pause. You read it again. What does that even mean? Did I break a rule? Am I in trouble? Is someone coming for my account?
Take a deep breath. You’re not alone, and no you’re not about to get arrested.
But yes, it’s something you need to understand.
In this blogpost, I will walk you through what a Good Faith Violation really means, why it happens, and how to avoid it going forward all in plain, simple words.
What Is Good Faith Violation?
A Good Faith Violation happens when you buy a stock using money from a recent sale, and then sell that stock before the original sale has fully settled
To understand a Good Faith Violation (GFV), you first need to understand how money moves when you trade stocks, especially when you’re using a cash account.
So here’s the deal:
When you sell a stock, the money you make from that sale doesn’t land in your account immediately. It usually takes two business days to fully “settle.” This is called the T+2 settlement rule trade day plus two extra days.
Now, during those two days, the money is kind of in limbo. You’ve sold the stock, yes, but the cash from the sale isn’t officially available yet. It’s like selling a car and waiting for the payment to clear.
If you take that pending cash and use it to buy another stock, that’s where things get tricky especially if you then sell that second stock before the money from the first sale settles.
Here is a simple example:
- On Monday, you sell Stock A and are expecting ₦5,000.
- That ₦5,000 will officially settle by Wednesday (T+2).
- But on Tuesday, you use that ₦5,000 to buy Stock B.
- Then later on Tuesday, you sell Stock B.
This simple illustration shows that you’ve just committed a Good Faith Violation.
Why? Because you used money that wasn’t fully settled yet to make another trade and then sold that new position too quickly, before the original funds got cleared.
In simple words: You acted on money that hadn’t actually arrived yet.
Why Is It Called “Good Faith Violation”?
The term “Good Faith” just means the system expects you to be honest and patient enough to wait until funds are officially cleared before making another move.
The name might sound funny, but it actually makes sense.
The market operates on a kind of trust, a “good faith” understanding that when you make trades, you’re using funds that are truly available.
When you buy and sell using unsettled funds, you break that trust. You’re essentially making moves on money that isn’t truly yours yet, and that’s what raises a flag.
Is Good Faith Violation Illegal?
No, it’s not illegal.
A Good Faith Violation is not a crime or fraud it’s just a breach of brokerage rules, especially for cash accounts. It’s like getting a yellow card, not a red card on a football field.
If you only commit one or two good faith violations, most platforms will just warn you. But if it keeps happening, your account may face restrictions. You might lose the ability to trade for a few days, or your account may be converted to something more limited.
Can You Avoid Good Faith Violation?
Absolutely. Yes! And once you understand how it works, it’s really not that hard.
Here’s how to avoid Good faith Violation
- Wait for Funds to Settle.
Before you use money from a recent stock sale, wait two business days for that money to officially settle. If you want to make another trade before then, make sure you’re using cash that’s already cleared.
- Know Your Account Type.
Most Good Faith Violations happen in cash accounts. If you’re using a margin account, this rule doesn’t apply the same way because the broker is lending you funds to trade, even while others are still settling. But margin accounts come with their own risks and responsibilities, so don’t jump into one blindly.
- Track Your Trades.
Keep an eye on your recent buys and sells. Most platforms will show you which funds are “settled” and which are still pending. Pay attention to that before placing new trades.
- Don’t Panic-Sell.
One common way people commit good faith violations is by buying a stock with unsettled funds and then panic-selling it a few hours later. Before hitting “sell,” ask yourself: Was this trade made with fully settled funds? If not, maybe wait it out.
- Use a Watchlist or Practice Portfolio.
If you’re feeling the urge to make quick trades but your funds aren’t settled yet, use that time to build a watch list or practice with a demo account. It keeps your hands busy without risking a violation.
- Ask Your Broker for Settlement Clarity.
If you’re ever unsure whether your funds have settled or not, don’t guess. Most platforms have support teams or dashboards that clearly show your settled vs unsettled balance. A quick check or question can save you from unnecessary penalties.
Conclusion
A Good Faith Violation might sound like a big deal, but it’s really just a reminder to be patient with how money moves in the market. It happens when you use unsettled funds to buy a stock, then sell that new stock too quickly. The system expects you to act in “good faith” by waiting for your money to properly settle before making your next move.
If it happens once, no stress. But if it keeps happening, your broker might hit the pause button on your trades. The good news is, it’s totally avoidable once you understand the rule. And now you do.
