What is a Good Faith Violation (GFV)?
A good faith violation occurs when you buy a security and sell it before paying for the initial purchase with settled funds.
Selling a position before it was paid for with settled funds is considered a "good faith violation" because no good faith effort was made to deposit additional cash into the account prior to settlement date.
Stocks and options now settle the next business day. Therefore, you can only incur a GFV if you liquidate a security, use those funds to buy something new and sell it the same day.
Example:
Funds available to trade with to start the day = $0.00
On Monday morning, sell ABC stock and net $5,000 cash proceeds
On Monday afternoon, buy ZZZ stock for $4,000
Then before the close, sell ZZZ stock for $4,250
Since ZZZ stock was bought and sold using the unsettled proceeds of ABC stock, this would be considered a good faith violation.
The first 3 GFVs will result in warnings. A 4th GFV within a year will result in a 90 day liquidation-only restriction. A 5th GFV after those 90 days pass will result in account closure.