Free riding (also known as Freeriding or Free-riding) is a term used to describe the practice of buying shares or other securities without actually having the capital to cover the trade. This is possible when recently bought or sold shares are unsettled, and therefore have not been paid for.

Since stock transactions usually settle after three business days, a trader can buy a stock and sell it the following day (or the same day), without ever having sufficient funds in the account.

In the United States, stocks take three days to settle. If you buy on Monday, you don't pay for the purchase until Thursday. This is known as trade day plus 3 days or T+3.

This three day settlement period is considered an extension of credit from the broker to the customer. Because the transaction is considered a credit issue, the Federal Reserve Board is responsible for the rule which is officially called Regulation T.

If a brokerage customer is approved for margin on the account there will be a line of credit to "cushion" the three day settlement period. This credit allows customers to trade while the cash settles. For accounts without margin (cash accounts), stock traders must have enough cash in the account to pay for any purchases the day they are due. A client in good faith agrees to make full payment of settled funds or deposit securities within the three day settlement period and not to sell before making such payment.