Understanding How to Use Margin Accounts to Avoid Free Ride Trading

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Your investing with a cash account and before you place your next trade you get a free ride notification saying you can’t sell within three days if you place the trade. You google or ask your broker “how to avoid free riding” and more likely than not, both will tell you to use a margin account!

Using margin happens to not appeal to you, because you only want to use money you own. You simply don’t want to use the leverage if you get the margin account. In this scenario, how do you use a margin account without leveraging and paying interest?

Most brokers do not charge interest during the settlement period known as T+3 (trade day+ 3 days, but  ask  your broker just in case). In other words, with a margin account, you can sell and then buy (using what would normally be unsettled funds in a cash account) with out paying any interest. You have to remember though, using a margin account will not eliminate the free ride problem completely, that is if you trade your portfolio too quickly. If you have under $25,000 in your account, you will only be allowed “three round trips” with in a day. If you try to do more your broker will stop you (unless you meet the $25,000 requirement) and want to be a day trader.

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