My question is about settled and unsettled funds in a margin account. I'm an occasional trader and would like to better understand the settlement dates. Basically, if a stock goes up x amount, I like to lock in my gains then immediately buy the stock back (which can make me $$$ in a down and sideways market) Sometimes the stock will rise quickly, and I find myself ready to sell a day or 2 after I bought it. However, I don't have the best understanding about settled funds, and the research I've done hasn't exactly explained it.

In this example, lets assume I have all my $$$ tied up in stock ($0 cash) and $10,000 in available margin. On 7/7/16, I sold 100 shares of MRO for $1,500. On 7/7/16, I then bought 100 shares of MRO for $1,500.

Funds settle 3 business days after the trade, so that would be on 7/12/16. 1) Do these funds settle at 11:59 PM on 7/12/16 or when exactly? 2) With a margin account, am I borrowing $1,500 from the brokerage for 6 days? (7th thru 12th) 3) What happens if I sell the new stock on 7/11/16 -- before the funds settle?

Thanks for the help!

Edit: My account had previously been a cash account, and has been converted to margin. I think I had been getting some wires crossed, so thanks for the clarification on settlement dates and margin accounts. As a result, I'll be trading more frequently (and making more $$!)

Sorry for any confusion -- I had initially included more info, then chopped it down since the post seemed like it was getting a little stuffy. But you guys seem to like more info, as long as it includes some sort of logic. Back in 2000, I bought Ford for $15 and still have some of that original investment. Today, it's $14. After dividends, I've eked out a small gain after 16 years. Could I have put that $$$ to better use by selling it at a loss? Sure, but after looking back at my history during that time, I sold out of AMZN at $28 and AAPL (adjusted) for $1 due to a new strategy. It would've been nice to have that reversed and kept 20% of my AMZN and AAPL purchases, just as I did my F.

I am occasionally changing my strategies based on experience. There have been some years where some stocks don't do much, and I want to capitalize on those years. Having done a lot of real trading and fantasy trading, there are certain strategies I want to pursue. According to my account history, some of my best stocks over the years have been the stable companies -- such as utilities. But they don't always go up. Sometimes they go down, and at other times they go sideways. Regardless, they always seem to pay a good dividend. So my recent strategy has been to buy more shares every time the price drops $1. It may leave me with 4 entry points, but I often end up selling out after the price goes up $1/share. And if the price keeps going down, then I'm getting a quality company at an even better price AND the dividend yield keeps going up. Am I losing out because of commissions? Not really -- this is made up for with daily volatility. Sometimes the price drops a few % for no apparent reason, other than a down day in the industry. It usually makes it up in a few days, which is $$$ in the bank for me. I've even gone back years and calculated this strategy against historical prices -- including dividend dates and potential margin expense. At no time did this strategy have more than 5 entry points. The quicker the utility fell, the quicker it regained it's loss. (perhaps some day if I get rich enough, I'll be able to pursue the strategy of doubling my share count every time the price drops $1 lol)

As far as the MRO example: I used that one b/c it was the last trade in my account, and I wanted accurate trade/settlement dates. During the last oil 'crisis' ; ) (when pump prices dropped from $4.25 in August to $1.50 in December, I discovered that it's best to trade market volatility in certain oil companies, otherwise you can easily get left in the dust. I left a lot of $$$ on the table back then, and have learned from that mistake. Fortunately I called a bottom in MRO within 20 cents or so, and made some good $$$ before it completely lost all those gains again.

And yes Bacon, I realize that short-term gains are taxed at a higher rate than long-term gains. But the volume of short-term gains seems to be to my benefit.

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    I must me missing something but I have no idea how you benefit from selling $1,500 worth of shares then buying back the same number of shares for the same $1,500 on the same day... – quid Jul 14 '16 at 3:45
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    @quid agreed - as it so often seems to happen on this site, the most important thing to discuss in a particular question is not the question itself, but the potentially flawed logic behind it... – Grade 'Eh' Bacon Jul 14 '16 at 12:47
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    @Johnny Could you elaborate on what you mean by "locking in" your gains by selling and immediately rebuying? Apart from not actually changing the economics of your shareholdings (apart from needless transaction fees), you will cause an acceleration of your taxable income for doing this in many jurisdictions. ie: You generally don't pay tax on gains on your investments, until those shares are sold. By selling and rebuying, you are recognizing the taxable income immediately, with absolutely no economic benefit that I can see. – Grade 'Eh' Bacon Jul 14 '16 at 12:49
  • @Grade'Eh'Bacon The example isn't great, but the question seems valid. He might make this trade, for example, because he's trying to capture value on an intraday downward move that doesn't materialize. Day trading is risky and costly, but that doesn't invalidate the question, especially since the OP seems focused on learning the rules, which would enable him to better understand the costs and risks. – user32479 Jul 14 '16 at 13:03
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    @Brick I agree that perhaps the example was poorly worded, but I wanted to point out to the OP that if you sell and rebuy a share immediately, at the same price, there is no benefit, and costs transaction fees and likely accelerates the recognition of your tax liability. – Grade 'Eh' Bacon Jul 14 '16 at 13:09

The issues of trading with unsettled funds are usually restricted to cash accounts. With margin, I've never personally heard of a rule that will catch you in this scenario. You won't be able to withdraw funds that are tied up in unsettled positions until the positions settle. You should be able to trade those funds. I've never heard of a broker charging margin interest on unsettled funds, but that doesn't mean there isn't a broker somewhere that does.

Brokers are allowed to impose their own restrictions, however, since margin is basically offering you a line of credit. You should check to see if your broker has more restrictive rules.

I'd guess that you may have heard about restrictions that apply to cash accounts and think they may also apply to margin accounts. If that's the case and you want to learn more about the rules generally, try searching for these terms:

  • Free riding
  • Good faith violation
  • Cash liquidation violation

You should be able to find a lot of clear resources on those terms. Here's one that's current and provides examples: https://www.fidelity.com/learning-center/trading-investing/trading/avoiding-cash-trading-violations

On a margin account you avoid these issue because the margin (essentially a loan from your broker) provides a cushion / additional funds that avoid the issues. It is possible that if you over-extend yourself that you'll get a "margin call," but that seems to be different than what you're asking and maybe worth a new question if you want to know about that.

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