The practice of purchasing of a security with little or no money down, holding it for a short period of time, and then selling it. If the security has increased in value, the investor keeps the profits. If the security goes down, the freerider will default, leaving the brokerage firm stuck with a loss. For example, an investor may buy and sell a share of stock in rapid order without putting up money for the transaction. Freeriding is prohibited and a violator will have his account frozen for a given period of time (usually 90 days). Freeriding could also refer to a situation where an underwriting syndicate member withholds a portion of a new securities issue in order to sell it later at a price higher than the initial price. This practice is illegal and prohibited.
April 12, 2023