Freeriding is the purchase and sale of a security without depositing the money required to cover the purchase price as required by Regulation T.
When an investor buys a security in a regular way transaction settlement occurs three business days later. Reg T allows another 2 business days for payment to be made. If a customer buys a security on Monday at $40 per share and Tuesday the price increases to $45 the investor would be said to be freeriding if he expected to sell the security on Tuesday and use the proceeds to pay for Monday’s purchase. In other words, even if a security increases in value before payment is made, the investor still needs to pay for the investment in order to be entitled to keep the profits from the sale.
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