0

I'm trying to figure out security settling rules.

Say I have a margin account and I own 100 settled shares of ABC stock. I then sell my ABC shares and on the same day I use the unsettled funds from that sale to purchase the XYZ mutual fund.

Since ABC stock settles T+2 and the XYZ mutual fund settles T+1, it means on T+1 I'm using unsettled funds from ABC to settle XYZ, right? Will that result in a one day margin loan and thus I will be charged interest for it?

Update: I'm in US and I'm talking about the US market. Sorry didn't realize I should make it clear first.

I talked to my broker (Schwab) and they said yes I'd be charged margin interest despite that the 'settled fund' number on the Balances page was including the money from a stock sale I did on the same day (which was why I had this question).

Improve this question
2
  • 1
    Likely not, but the question is impossible to answer without knowing jurisdiction and even then it might be impossible to know without knowing which broker. The answer you seek likely lies in the fineprint of your account.
    – xyious
    Commented Dec 6, 2019 at 22:23
  • 1
    Trading in a margin account allows you to use unsettled funds. This avoids settlement date violations. Margin interest is not charged if you are not borrowing money. For same day settlement, there is no margin fee. Whether you are charged margin interest for this situation will depend on your broker's policy concerning disparate settlement dates and whether they consider than you are borowring money for a day. Call them.
    – Bob Baerker
    Commented Dec 7, 2019 at 0:13

1 Answer 1

Reset to default
-1

In the US, this would be a Trading Violation, and the consequences for the first time depend on your broker - could be they charge you interest, could be they force-sell from whatever securities you own to cover (including the ETF you just bought), or could be they only email you a warning.
Second/third time, punishment will be harsher, for example Vanguard: "Any 3 violations in a rolling 52-week period trigger a 90-day funds-on-hand restriction. During this time, you must have settled funds available before you can buy anything.' (https://investor.vanguard.com/investing/online-trading/trading-penalties); others have similar rules.

Improve this answer
3
  • 4
    The OP is using a margin account so there would be no trading violation as long as the cost of XYZ mutual fund was not more than twice that of ABC shares sold (50% margin). Your Vanguard link is referring to violations in a Cash Account. Toward the bottom it has a section titled: HOW TO AVOID TRADE RESTRICTIONS. One of the listed ways to do is: CONSIDER MARGIN INVESTING FOR NONRETIREMENT ACCOUNTS.
    – Bob Baerker
    Commented Dec 7, 2019 at 1:22
  • 1
    The system bumped this to top page. @BobBaerker - would you like to turn your 2 good comments into one answer?
    – JTP - Apologise to Monica ♦
    Commented Jan 12, 2020 at 12:27
  • If you don't mind, I'm going to let it stand as is because though it may apply somewhat to the original question, this comment was for this answer.
    – Bob Baerker
    Commented Jan 13, 2020 at 16:50

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .