A good faith warning is issued when a customer buys on unsettled funds. This is not a violation until the customer actually sells what they bought (without allowing the original purchasing funds to settle). Remain in your position until your funds settle, and the warning should go away. Again, a warning does NOT become a margin call unless you sell before your funds have settled.
This type of warning is typically issued in cash accounts. In some instances, your account may show buying power even if funds from a recent sale have not cleared. If you use that non-existent buying power, you’ll be issued a good faith warning. If you then sell those shares before the funds from your recent sale have settled, you’ll receieve a margin call.
Tags: margin call
Another way of looking at it: This all hinges on whose money you were using to buy that second stock with. Was it your money? Are you sure? Just because some online trading software you are using at K00LBrokers-R-Us.com lumps it in with your “buying power”, it doesn’t mean than you are completely entitled to the money yet. I say “completely”, because the rules say that you CAN buy something with it. But then your next move? Be careful. You have to hold on to that newly-bought stock until you really own the money that you used to buy it with. That event, “really owning the money” occurs at settlement, which in the U.S. is typically three business days after the sale. So in the regulation, when they mention “paying for it”, they really mean “paying for it with your own money and not your broker’s money.” The regulation says, “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 the credit extension provisions of the Federal Reserve Board. If you free ride, your broker must freeze your account for 90 days.”
(There are some intermediate steps, because free riding is an extreme case. Depending on the circumstances of the good faith violation, your restriction may less harsh at first, you can still trade, but only with settled funds. Further violations could result in the account freeze, and still further ones could result in termination.)
This all sounds complicated, but it really isn’t. Here is a scenario:
1. Sometime in August, spend all the cash in your account on XYZ Company stock. Sell XYZ on Monday, October 3, for net $1000 after commission and fees. Your on-line broker’s website says you have $1000 of “buying power”. Cool! (It’s REALLY cool, because you don’t really have $1000 yet. Your broker is loaning you $1000 until Thursday.) So, let’s say you see something attractive on Tuesday: ABC Company stock. You buy $800 worth of ABC on Tuesday. Was that a problem? No. But if you are trading at eoption.com or zecco.com, etc., you’ll see a “Margin Call” flag, and if you click on it, you’ll see the “Good Faith Warning” message. All that warning means is: your broker is reminding you that he loaned you the money to buy ABC, even though you don’t have that kind of account (called a “margin account”). There is no actual margin call in this case, as confirmed by the “NO CALL” message you will see on the web page. Everything is cool, and you haven’t done anything wrong. Sit tight and don’t touch your new ABC stock until Thursday. That’s when your loan is no longer a loan–you now legally own the money that you used to buy ABC back on Tuesday. Now that you own ABC free and clear, you can do what you want with it. Had you sold it before Thursday, you would have committed a Good Faith Violation.