- An illegal practice of buying then selling stock before paying for it. Securities transactions take between one and three days to clear, during which time the funds associated with the purchase and sale cannot be used for other purchases or sales.
Options and mutual funds typically require just a one-day settlement date (the time needed to finalize the transaction). Exchange-traded funds and stocks, however, have a three-day settlement date. If you are trading in a cash account, you need to have enough cash to cover the purchase right away. You also need to hold on to the securities you purchased until the purchase is settled. If you buy and sell through a broker (as opposed to your own cash account), you may be less likely to run into trouble because the broker automatically lends you money to pay for the transaction. If you are accused of freeriding, your cash account may be frozen for 90 days.
Because trades happen so quickly, committing a freeriding violation is fairly easy to do by mistake. Nonetheless, you need to keep careful track of your transactions to avoid this misstep.
- Interpersonal relationships: Acting as the member of a friend group who always participates in group-funded meals or activities but never pays his share.
Freerider: “Hey guys, mind if I finish the pizza? I’ll totally pick up dinner next time.”
Friends: “No you won’t. You can finish the pizza, but at least own the fact that you are freeriding.”