Free Riding

Posted in Finance, Accounting and Economics Terms, Total Reads: 721

Definition: Free Riding

Free riding is a practice in which a person buys and sells shares without actually possessing any funds to do so. Free riding is a term which is used in the stock trading.  A free rising violation is occurred when this is caught. The name is inspired from free riding or free loading in which people access services or food without actually paying for it.

The regulation by Federal Reserve Board requires the brokers to freeze the accounts committing the freeriding violations for the 90 days. 

The Securities and Exchange Commission states “one must pay for purchasing of a stock before he can sell it, in the cash account. If one buys and also sells the stock before paying for it, he is freeriding. It means that he is violating the credit extension provision of the Federal Reserve Board. If you are trading rapidly by using all the cash available in your account to buy and sell the shares, you are likely to get a "freeriding violation." It is subject to mandatory three months cash up front restriction.

Hence, this concludes the definition of Free Riding along with its overview.


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