Free Riding.  It sounds so fun - but it is not.  Free Riding is actually a violation of the Federal Reserve Board's Regulation T (Reg T).  Reg T governs how you pay for transactions in cash accounts (this does not apply to margin accounts). 

When you sell a stock, those funds that you receive from the sell, don't actually settle for three business days.  You are allowed to purchase stock with unsettled funds, as long as the funds you used for the purchase are settled prior to selling the stock.  Confused yet?  Let's take a look at an example: 

On Monday (Day 1), you sell stock ABC for $100.  On the same day, you turn around and buy XYZ with that $100.  

On Tuesday (Day 2), XYZ goes up to $115 and you sell.   

You are in violation of Reg T.  Why?  The $100 from your sell of ABC takes 3 business days to settle.  So, you are allowed to buy XYZ with that money, but you can't sell XYZ until the $100 settles.  The $100 you used to buy XYZ were not settle before you sold XYZ.

Remember, Free Riding only concerns cash accounts.  If you happen to violate Reg T, you will receive a warning the first and second time. However, the third time can result in a 90-day restriction on your account - and you don't want that!

Watch the Regulation T webcast to learn more.