Pricey, what happened to you at Waterhouse has happened to me at NDB.
It is because you violated the "Free Ride Rules" and it is in fact an
SEC thing, not the brokerage. What I think is really sad is that I
did this to myself 3 times over a 2 year period before I finally
figured out by myself what was happening. The stupid customer service
people could never explain it to me because I got the feeling they
didn't understand it themselves... at least not as it applied to my
situation. Let me explain why the free ride rules were created and
how I accidentally violated them...
Here is the case the rule is trying to prevent:
Let's say that I have $1,000 in my account and I see a great stock so
I buy $11,000 worth of stock. The stock goes up, and before the end
of the day I sell the whole mess for $25,000. I essentially borrowed
$10,000 from the house on the assumption that I would good that money
to the broker prior to settlement. By selling before the end of the
day I now have a cash ballance of $15,000 after erasing the deficit
in my account. Sounds pretty cool, but it's a big no-no in the eyes
of the SEC. You are very welcome to do this, but you must still
deposit the $10,000 within a couple of weeks to prove that you actually
did have the money or else you will be placed on a 90 day restriction
where you are only allowed to buy with money that is already in your
account. The restriction will follow you even if you change brokers
during the 90 day period because it is attached to your SS# by the
SEC...
Here is how you can get burned by accident:
Let's take our earlier example but use it the way I got burned by this.
Your have $1,000 and you see a great stock. You jump in and buy $1,000
worth and jump back out after 20 miniutes with a 20% profit. Now you
are sitting on $1,200 cash in your account and you start looking
for another stock to buy... BUZZZZZZ wrong answer. That money cannot
be used again until the next tarding day without violating the free
ride rules. If you have a margin account, you can go farther because
additional buys will begin eating at your available margin assuming
the securities you buy are marginable. Once again though, you could
run out of margin buying power really quickly and be back in exactly
the same position.
So why does this happen? Well, to you and me it looks like we have
$1,200 in our account (and that's what our account balance reads when
we look at our account) but those trades have not settled yet. We
need to keep in mind that although all of this takes place seqentially
to us what is really happening is that all the orders for a given day
are being grouped and executed. So if I use the $1,200 to buy another
stock, what I have at the end of the day is this:
Buy $1,000 of XYZ
Sell $1,200 of XYZ
Buy $1,200 of ABC
When you add this up, you can see I had $2,200 worth of buys, and
I ony started the day with $1,000. It doesn't matter that I had a
sell in there for $1,200.
SO... follow this simple rule and you'll be ok: The money received
from selling anything you buy the same day is "frozen" until the
following day.
There is a pretty good article on this in the Invest FAQ but this is
a rough thing to try and explain... just follow this rule and you
won't get burned. This is the reason why brokers like NDB will tell
you that they don't allow daytrading. A true daytrading broker will
cover you with essentially infinite margin while you perform your
transactions. (The invest FAQ url is: invest-faq.com) |
