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I've been using a margin account but recently I opened a cash account. I was hit with a 90 day penalty on the cash account because I didn't wait 3 days for the sale of previous stocks to settle before purchasing new stocks.

My broker was kind enough to show me the SEC rules.

Anyone else encountered this problem?
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This is the reason to have a margin account even though you do not want to trade on margin.

So far as I know the 3-day rule harks back to a time when people did not hold the stocks in street name - that is at the broker. So when you sold something, you got in your car, drove to the broker, and gave him the stock. This might take some time.

Then somebody (Merrill Lynch maybe) developed a cash management account. You got to hold all your stocks and cash (money market, also, I think developed by Merrill Lynch) in one account. Then you could buy and sell freely, but there was still that 3-day rule. Hence you need a margin account even if you do not trade on margin.

Maybe somebody else has more knowledge of the history. I am old enough to remember the invention of the cash management account, but also old enough to have forgotten the details.
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TD Ameritrade and perhaps other brokers allow margining IRAs for settlement avoidances, only. They
do not allow using leverage. I have never had to wait for the 3 day settlement and I do it almost every
week. I believe you have to set this up in your account profile.

RAM
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I was hit with a 90 day penalty on the cash account because I didn't wait 3 days for the sale of previous stocks to settle before purchasing new stocks.

Yes, that's the rules.

Just2trade avoids this by not letting you buy using non-settled funds.

Optionshouse lets you buy, but if you sell before settlement you get dinged with a "good faith" violation.

Etrade lets you buy, but with an extra warning screen about buying with unsettled funds. If you voilate, they won't let you place buy orders online for 90 days, you have to do a phone order (with the extra fee).

Brownco (R.I.P.) would not let you place any opening orders, only closing orders, for 90 days.

That's why it's best to have a margin account.
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TD Ameritrade and perhaps other brokers allow margining IRAs for settlement avoidances, only. They do not allow using leverage. I have never had to wait for the 3 day settlement and I do it almost every week.


IB also. They call it a cash account, and there's no leverage, but you can sell and buy with the proceeds same day. But, if you don't use the proceeds to buy same day, then you have to wait 3 days for the funds to settle. Which is odd. Also I think if you are using the proceeds to buy some other type of instrument, like options, then the settlement period may come into play. (Not sure about that.)
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I've been using a margin account but recently I opened a cash account. I was hit with a 90 day penalty on the cash account because I didn't wait 3 days for the sale of previous stocks to settle before purchasing new stocks.

My broker was kind enough to show me the SEC rules.

Anyone else encountered this problem?


Your broker was BSing you.

There is no SEC rule, for cash accounts, that says you can't buy stock with unsettled cash. The only thing the SEC prohibits is the following - you sell stock A in a cash account. You buy stock B with the unsettled cash. You sell stock B before the end of the settlement period.

There are several brokers around who have implemented the stricter rule you described. This is not due to the SEC rule. It's due to their incompetent account tracking which renders them unable to enforce the correct SEC rule. If you must trade in a cash account, such as an IRA, you would do well to steer clear of the sloppy brokers.

I routinely buy shares in my IRA account with unsettled cash. I do it every month. Never a problem.

Elan
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I've been using a margin account but recently I opened a cash account. I was hit with a 90 day penalty on the cash account because I didn't wait 3 days for the sale of previous stocks to settle before purchasing new stocks.

It looks to me like your broker screwed up on Regulation T (http://www.sharebuilder.com/sharebuilder/help/topic.aspx?Cat...). I dumped my last broker and moved to TDAmeritrade because that last didn't understand the reg. If you sell A, you can, in fact use the proceeds to buy B at any time, including on the day you sold A. You just can't then sell any part of B before the sale of A has settled, three days later. I do this all the time in my cash accounts at TDA.

Note: I'm not a licensed broker, nor do I play on on the radio.

Eric Hines
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I routinely buy shares in my IRA account with unsettled cash

Been awhile since I have used Scottrade, but they allowed the purchase with unsettled sale.

T Rowe Price also allows
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There is no SEC rule, for cash accounts, that says you can't buy stock with unsettled cash. The only thing the SEC prohibits is the following - you sell stock A in a cash account. You buy stock B with the unsettled cash. You sell stock B before the end of the settlement period.

I never had to deal with this.
Perhaps because I never wanted to sell a stock less than three days after buying it. Since I am not a day trader, why would I buy a stock I intended to keep less than three days?
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why would I buy a stock I intended to keep less than three days?

What you intend to do and what you may need to do are two different things. You may, for example, set a stop which can be activated at any time since there could be bad news that causes a drop in the stock. Nobody knows what is going to happen.
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Perhaps because I never wanted to sell a stock less than three days after buying it. Since I am not a day trader, why would I buy a stock I intended to keep less than three days?

One reason it could happen is timing. If your timing signal goes bearish two days after you last updated your portfolio, and you follow the signal, you'd be selling right after you were buying.


Mark
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I never had to deal with this.
Perhaps because I never wanted to sell a stock less than three days after buying it. Since I am not a day trader, why would I buy a stock I intended to keep less than three days?


By accident.
Sold by accident or bought by accident then sold to correct the mistake.

Placing a market buy order and having the price move up and you get filled at a price higher than the amount of your cash balance. Either you or the broker *must* sell something right away, because an IRA is definitely not allowed to be in margin. If you or broker sell the same stock you just bought, that's a "free-riding" violation.
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Perhaps because I never wanted to sell a stock less than three days after buying it. Since I am not a day trader, why would I buy a stock I intended to keep less than three days?

One reason it could happen is timing. If your timing signal goes bearish two days after you last updated your portfolio, and you follow the signal, you'd be selling right after you were buying.


Well, you can't do that in a cash account. I don't know of any timing signal with such a precise hair trigger that you can't wait two days, if necessary, before selling.

Elan
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Placing a market buy order and having the price move up and you get filled at a price higher than the amount of your cash balance. Either you or the broker *must* sell something right away, because an IRA is definitely not allowed to be in margin. If you or broker sell the same stock you just bought, that's a "free-riding" violation.

1. Never use market orders.
2. At Fidelity, they keep a running tally of "cash available to buy" and stop you from submitting an order that will go over the limit.
3. Never use market orders.

Elan
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JimZipCode
IB also. They call it a cash account, and there's no leverage, but you can sell and buy with the proceeds same day.


Jim's "cash account", is (I think) technically set up as a Margin Account for trading purposes. Mine's set up the same way. But I ran into a problem at IB for an IRA in my daughter's name, who is under 21. IB enforced the 3-day settlement on the latest round of monthly trades for her (the first that involved both buys and sells since transferring money from TDAmeritrade to reduce commissions). I called them, and they recommended the account be upgraded to a Margin Account, but when I went through the motions I was stopped with the reason of "you can't have a margin account at IB if you are less than 21 years old." I called again and asked about getting a waiver simply to not have to abide by their 3-day settlement rule for cash accounts, and the service rep said there'd be no chance of a waiver. I had no problems trading her portfolio at TDAmeritrade with unsettled cash....
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Jim's "cash account", is (I think) technically set up as a Margin Account for trading purposes. Mine's set up the same way. But I ran into a problem at IB for an IRA in my daughter's name, who is under 21. IB enforced the 3-day settlement on the latest round of monthly trades for her (the first that involved both buys and sells since transferring money from TDAmeritrade to reduce commissions). I called them, and they recommended the account be upgraded to a Margin Account, but when I went through the motions I was stopped with the reason of "you can't have a margin account at IB if you are less than 21 years old." I called again and asked about getting a waiver simply to not have to abide by their 3-day settlement rule for cash accounts, and the service rep said there'd be no chance of a waiver. I had no problems trading her portfolio at TDAmeritrade with unsettled cash....

I suggest giving them a waiver, as in waving bye bye. And be sure to tell them why you're dumping them.

BTW, maybe they choose not to waive the 3 day rule for cash accounts. (It is strictly their choice because Reg T doesn't require it). Ask them instead to waive their restriction on margin accounts under age 21, given that you are a responsible adult with power of attorney to manage the account.

Elan
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1. Never use market orders.
3. Never use market orders.



Every once in a while I'm tempted to use market orders, out of impatience. Some of those times I get a great fill at IB, inside the spread. It's like the random reinforcement that gets a gambler hooked.

Today I got my lunch eaten three times, sells at 2 or 3 or 4 cents below the bid. Thanks, market maker.
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You may, for example, set a stop which can be activated at any time since there could be bad news that causes a drop in the stock.
Hypothetical:
Investor A buys stock, doesn't set stop, loses 25% in the position.

Investor B buys stock, gets stopped out at 10% loss.
His super duper screen, and whiz bang bear catchers and NHNL are still flashing green so he purchases the next stock and of course set's his 10% stop loss, which unfornately gets tripped.

Everything is still green so he buys another great stock from his super duper screen and of course sets his 10% stop loss. Dangit it gets tripped also but hallelujah for stops and the sense to use them.

It's been a rough 3 trades in a row but at least I didn't have a 25% loss in that one stock that poor investor A had so it's all good. Drinks all around.

Bryan
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Hmmm, 3 subsequent trades with a 10% loss. First trade drops you to 90% of your beginning stake. Second brings you down to 81%. Third, brings you down to 73%. Suddenly the 25% loss doesn't look so bad.
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