Avoiding Trading Restrictions on Your Brokerage Accounts

The Board of Governors of the Federal Reserve has issued guidance regarding Regulation T. I know, I know ... it sounds complicated but it really is very simple and might affect your brokerage accounts. In short, customers that have cash (not margin) accounts are "prohibited from selling securities prior to making full cash payment for the shares."

In other words, imagine that you own 100 shares of Coca-Cola for $52 each. You sell the stock for $5,200 and immediately turn around and place an order for $5,200 worth of McDonald's stock. In this case, you didn't wait for the three day settlement period to pass so you were technically using money that didn't belong to you because the Coca-Cola hadn't officially "traded hands" despite it disappearing from your brokerage statement and cash showing up in its place. If you were to then turn around and sell the McDonald's stock, your account would be subject to trading restrictions for 90 days. That means you may not be able to buy or sell the investments you need or want.

There are ways to avoid these trading restrictions. First, you can deposit additional cash into your account that would have been sufficient to cover the purchase. Second, you can combine brokerage accounts so that the bigger asset or cash base would accomplish the same thing.

In most cases, you probably aren't going to lose sleep over the situation but it's one of those small things that could shock you if you didn't expect it and we want you to be prepared!