/ Q&A

Can You Sell A Stock Right After You Buy It?

You can sell a stock right after you buy it, but there are limitations. In a regular retail brokerage account, you can not execute more than three same-day trades within five business days. Once you cross that threshold, you are considered a pattern day trader and must and must maintain a $25,000 balance in a margin account.

A common question among novice investors relates to how soon you can sell a stock after it is purchased. While many investors tend to buy and hold shares for years, others prefer to capitalize on short-term market movements to get in and out of positions within days or even minutes of purchase. However, selling too soon may unwittingly cause you to commit a trading violation and result in restrictions being placed on your account.

Stock Trade Settlement

While there are situations where you can sell a stock on the same or the next day after you buy it, doing so may cause a trading violation. Before 2017, you had to wait three days to sell a stock, but now it is only two days. This “T+2 settlement cycle” reflects the period when the stock purchase transaction clears the books.

While you own the stock the second you buy it, it takes a couple of days for the settlement process to run its course and the shares to reach your account. During this time, the trade is verified, buyer and seller account numbers are confirmed, and details around things such as dividend payments are ironed out in the back office. After placing a buy order, the cash is due in two days. After two days, your money exits your account and the shares take its place.

The Penalty Box

Often referred to as free riding, the rule exists because the U.S. Securities and Exchange Commission (SEC) wants to avoid a situation where shares are flying around before they officially reach an account. Free-riding means selling a security before you pay for it.

A violation of the free-riding rule may cause your brokerage firm to freeze your account for 90 days. This does not prohibit you from trading but does require that there is sufficient up-front cash in your account to cover any future trades. This is often displayed as ‘Settled Cash Available to Trade’ on your brokerage platform screen. Unsettled money cannot be used for trading during this penalty period. Trades must be paid for on the same day of purchase rather than after the two-day settlement is over.

Day Trading

Day traders are people who buy and sell stocks for a living within the same trading session, so why are they allowed to do so?

Once you have traded in and out of a stock four or more times over five trading days, your account will be tagged as a pattern day trading account. Once labeled as a pattern day trader, you must meet the day-trading margin requirements The account must be a margin account and contain a balance of at least $25,000. A margin account allows traders to use leverage by borrowing from the broker.

To avoid the pattern day trading rule, an investor can buy one day and then sell the next day. This would not be considered a day trade. Some investors may prefer to time an in-and-out trade as close as possible by buying in the late afternoon on one day and selling at the open the next morning. Although the trades may be separated by minutes in terms of trading session time, they occur on separate days and, as such, would not be considered a day trade.

What About Repurchasing a Stock After It Is Sold?

Some investors sell a stock solely to take the capital loss as a tax write-off. Declines in stock investments can be used to offset gains made in other stock positions as long as it isn’t a wash sale.

Wash-sale rules come from the IRS and govern the tax treatment of immediately repurchasing a recently sold stock. You must wait 60 days before buying back the same stock you sold to avoid a wash sale. If you buy back the previously sold stock before the 60 days, the loss will not be permitted as a tax write-off. If the stock was sold at a profit, then this rule would not apply.

The Last Word

Those that do not wish to have their account designated as a pattern day trading account can stay within the five-day limit and make sure at least one calendar day separates the stock buy from the stock sell. Freeriding is selling a stock before a trade settles, and purchasing a share soon after selling it is considered a wash sale and may not be used for tax purposes.

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Leo Smigel

Based in Pittsburgh, Analyzing Alpha is a blog by Leo Smigel exploring what works in the markets.