What is Free Riding?
Also known as freeriding or free-riding is a term used in stock-trading to describe the practice of buying and selling shares or other securities without actually having the capital to cover the trade. In a cash account, a free riding violation occurs when the investor sells a stock before fully paying for the purchase of the stock.
The Federal Reserve Board's Regulation T requires brokers/broker dealers to "freeze" accounts that commit freeriding violations for 90 days. Accounts with this restriction can still trade but cannot purchase stocks with unsettled sale proceeds (stocks take two business days to settle). Freeriding can be avoided by using a margin account.
When an account conducted free riding violation, any gains from the trading activities should not be realized due to purchase of securities is not fully paid for. Therefore, the trades may be cancelled and no withdrawal is allowed.