24. The prohibited practice of buying stock in a cash account and then selling it before it has been paid for is known as:
Answer: C
Freeriding is the prohibited practice of buying stock in a cash account and then selling it before it has been paid for.
Freeriding occurs when an investor purchases securities without sufficient funds in their cash account and then sells them before settling the purchase, violating regulations set by the Securities and Exchange Commission.
A) kiting.
Kiting refers to the illegal practice of taking advantage of the time it takes for checks to clear by writing checks on funds that are not yet available. This does not relate to trading stocks or the specific practice of selling stocks before payment.
B) churning.
Churning is the unethical practice of excessively trading in a client's account primarily to generate commissions for the broker, rather than to benefit the client. While it involves trading, it does not pertain to the act of selling stocks before they are paid for.
C) freeriding.
Freeriding is accurately described as the act of buying stock in a cash account and then selling it before it has been paid for. This practice is explicitly prohibited as it circumvents the requirement to have sufficient funds for the purchase.
D) front running.
Front running is the unethical practice where a broker executes orders on a security for their own account while taking advantage of advance knowledge of pending orders from their clients. It is unrelated to the concept of buying and selling stocks in a cash account without payment.
Conclusion
Freeriding is the only option that directly addresses the question regarding the prohibited practice of trading stocks without the necessary funds, making it the correct answer. All other options involve different unethical practices in the financial trading realm, which do not fit the specific definition of freeriding.