What are unsettled funds and why am I being warned or restricted from using them?
Under Regulation T of the Securities and Exchange Act of 1934 all transactions in a cash account must be paid for in full and are also subject to settlement rules. If you purchase a security with settled funds in your cash account you may sell that security at any time without restriction. If you purchase a security in your cash account with insufficient funds or unsettled funds you must hold that security until the purchase is fully paid for with either a new deposit or the settlement date is reached for the funds used. Read our Unsettled proceeds sales disclosure here.
Stock trades settle 3 business days following the trade date (T+3) and Option trades settle 1 business day following the trade date (T+1). According to this rule, sale proceeds generated by selling stock in a cash account are considered "unsettled" for a period of 3 business days following the trade date. You may re-use the unsettled sale proceeds to purchase another security prior to the settlement date of those funds however, in doing so you are agreeing in good faith to hold the new purchase at least until the funds from the original sale settle. If you sell the security that was purchased all or in part with unsettled funds prior to those funds settling it will be considered a violation of SEC rules and your account will be restricted for a period of 90 days. During that time you must place your trades over the phone with a live broker.
The original theory for this rule is that a customer who sells securities prior to paying for them in a cash account (either with a new deposit or settled funds from a prior sale) has received an extension of credit. Credit transactions must be executed in a Margin account. To apply for a Margin account please submit a margin application. There is minimum account equity of $2,000 for a margin account. Margin accounts are subject to Day Trading rules. Ally Invest does not promote day trading.