What Is a Blocked Period?
A blocked period refers to the length of time in which an investor’s securities are prevented from being accessed. A blocked period may be put in place if an investor has used a security as collateral, as it prevents the investor from using the same security as collateral or from selling the security. It may also refer to a period in which an investor cannot access account funds.
Key Takeaways
- Blocked periods denote periods where an investor cannot access their assets. Brokerages and financial institutions may place a hold on the securities in an investor’s account for several reasons.
- Brokerages may be required to block an account for a period if the account holder buys or shares securities without having sufficient capital to complete the trade, referred to as freeriding. The specific regulation governing this is called Regulation T and specifically relates to cash accounts.
- For novice traders, familiarizing oneself with these rules beforehand will make life a lot easier because a blocked period can come as a surprise to those unaware of the rules and laws. A lot of these rules are in place to protect both the investor and the broker-dealer.
How a Blocked Period Works
Blocked periods denote periods where an investor cannot access their assets. Brokerages and financial institutions may place a hold on the securities in an investor’s account for several reasons. Reasons include the investor being labeled a day trader using a margin account, or the investor using a security as collateral in a trade.
Investors who trade frequently may be considered to be day traders by the Securities and Exchange Commission (SEC). This label may bring with it requirements for how much money must be available in the investor’s account at a particular point in time. A pattern day trader label is given if an investor buys or sells stocks using a margin accountmore than a defined number of times during a week.
Brokerages may be required to block an account for a period if the account holder buys or shares securities without having sufficient capital to complete the trade, referred to as freeriding. The specific regulation governing this is called Regulation T and specifically relates to cash accounts.
For novice traders, familiarizing oneself with these rules beforehand will make life a lot easier because a blocked period can come as a surprise to those unaware of the rules/laws. A lot of these rules are in place to protect both the investor and the broker-dealer.
An Example of a Blocked Period
If an investor with a cash account tries to purchase shares with funds that have not yet been settled from a previous trade, the brokerage firm's compliance and trade monitoring department may issue a blocked period. The blocked period lasts ninety days.
During this time, the investor may make purchases, but only with completely settled funds. Investors can avoid this type of blocked period by trading on margin, though margin accounts are subject to other rules regarding minimum balances.
If this investor has $5,000 in their cash account and decides to buy 100 shares of ABC for $50 per share, they transact the trade. If a day later they decide to sell the shares for $52 per share, they will be blocked because the funds have not had the chance to settle from the purchase when the investor sold it.
Generally speaking, U.S. equities clear T + 2. So, if the purchase of ABC happened on a Monday, the investor would not be able to sell that security until the settlement date of Wednesday at the earliest.
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Now, let's delve into the concepts mentioned in the article about "Blocked Periods":
Blocked Period Definition:
A blocked period refers to a duration during which an investor's securities are inaccessible. This restriction is typically imposed for various reasons, such as using a security as collateral or engaging in certain trading practices.
Reasons for Blocked Periods:
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Collateral Usage:
- Blocked periods may be initiated when an investor uses a security as collateral. This restriction prevents the investor from utilizing the same security as collateral or selling it.
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Regulation T and Freeriding:
- Brokerages may block an account if an investor engages in buying or selling securities without sufficient capital, a practice known as freeriding. Regulation T, a specific regulation governing this, applies to cash accounts.
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Day Trading and SEC Labeling:
- Frequent trading may lead to an investor being labeled a day trader by the Securities and Exchange Commission (SEC). Day traders may face specific requirements for available funds in their accounts.
How a Blocked Period Works:
- Brokerages and financial institutions may impose holds on securities for various reasons, including day trading practices and using securities as collateral. Such periods are enforced to regulate trading activities and ensure compliance with regulations.
Example of a Blocked Period:
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If an investor with a cash account attempts to purchase shares with unsettled funds from a previous trade, a blocked period may be issued, lasting for a specified duration (e.g., ninety days). During this time, the investor can only make purchases with fully settled funds.
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To avoid this type of blocked period, investors can opt for margin trading, though margin accounts are subject to additional rules regarding minimum balances.
Settlement Period:
- The article mentions the concept of T + 2, indicating that, generally, U.S. equities clear two days after the trade date. For instance, if a purchase occurs on a Monday, the investor can only sell that security on the settlement date, which is Wednesday at the earliest.
Understanding these concepts is crucial for investors, especially novices, to navigate the complexities of trading regulations and protect their interests, as well as those of broker-dealers.
