You can sell a stock you own as soon as you have paid for it.
You can sell a stock you own as soon as you have paid for it. To determine when you have paid for it requires a little background information.
First, as it appears you already know, settlement of a stock trade does not occur until the third business day after the trade. So if I buy a stock on Monday, the regulations say I do not have to give the brokerage the money for the purchase until Thursday. [Brokerages may have stricter requirements than the regulations require, so a brokerage may require you to have deposited the funds for a trade before you make the trade.] Similarly, if I sell a stock on Monday the funds from the sale are not available in my account until Thursday.
Second, there are two basic types of accounts for individual investors, cash accounts and margin accounts. A margin account allows you to use holdings in your account as collateral for a loan from your broker.
Third, if you make too many trades in your account in a short period of time you will be classified as a "day trader". Day trading is only allowed in accounts of $25,000 or more. If you do not have $25,000 in you account and get classified as a day trader you brokerage is required to limit your trading for a period of time, which could have an impact on how soon you could sell a stock.
Here is an example of how a person could violate the "free riding" rule. Assume John has an account with $10,000 in it. On Monday he pays $7,000 for some stock. Tuesday morning he sells that stock for $7,300. Tuesday afternoon he buys $5,000 worth of another stock. Wednesday he sells the stock he bought Tuesday for $5,050. The sale on Wednesday violated the free-riding rule because he had not paid for that stock before he sold it. You can see why if you look at what was in his account after each transaction. After the trade on Monday, he had $3,000 available in his account. After the sale of the stock on Tuesday he still only had $3,000 in his account; the $7,300 from the sale would not be deposited into his account until Friday. When he bought the second stock Tuesday afternoon he was buying stock for $5,000 when he only had $3,000 in his account. This was not a problem because the settlement date for the purchase was Friday, and on Friday the $7,300 from the sale would be deposited into his account. The problem occurred on Wednesday when he sold the second stock. He had not fully paid for the stock he was selling. He needed funds from the first sale to pay for the second stock.
Note that John would not have violated the free-riding rule if:
(1) He had only sold half the stock he bought on Tuesday. Half of the stock he bought cost $2,500 and he still had $3,000 in cash to cover that amount.
(2) He had a margin account. With a margin account the broker would lend him $2,000 go with the $3,000 he already in the account in order to cover the entire $5,000 purchase.
In summary, you do not have to wait for the settlement date of the purchase, but you do have to wait for the settlement date of a previous sale if you needed the funds from that sale to buy the stock.