Day Trading Rules and Regulations



It is one of the first, confusing facts for the neophyte trader.
Day trading rules and regulations.
Let's say Bill wants to start trading stocks. He opens an account with an online broker. He funds it (puts money into the account) and he applies for a margin account (margin is the amount of money the broker allows Bill for trading, on top of his equity position).

Bill puts in $5000 and his broker puts in $5000. Bill doesn't like the idea of holding stocks over-night, so he buys and sells his stocks on the same day. He does this three times in just his first day alone. Since he is new to day trading, he feels okay about just breaking even on his first day.

On day two, he does the same thing. And either before he executes the trade, or very soon afterward, he gets an email message from his broker. Something about a "margin call". The broker is demanding that Bill deposit an additional $20,000 into his account immediately since he is now considered a pattern day trader.

Bill freaks out because he doesn't have $20,000. His palms get sweaty. He suddenly feels like a gambler who cannot repay his debts. And he anticipates a knock at the door any minute.
What Bill failed to do was to read the fine print supplied by his broker. It looked like standard contract stuff to him, so he just glossed over it. But if Bill had read the fine print regarding accounts, margins, day trading rules, and day trading regulations then Bill would have known not to do what he just did.

So, stated in simple terms (please read your broker's fine print), these are the day trading rules and regulations. If a trader makes a same day round trip transaction (meaning the trader buys and sells, or shorts and covers, the same stock in the same day), then that is considered a day trade.
If the trader does this more than three times during a five-day period that the market is open, then the trader is considered a pattern day trader. And a pattern day trader is required to have at least $25,000 equity in that account. This is the S.E.C.'s rule, not the broker's rule.

Lacking the $25,000, the broker is required to issue a margin call and demand that the trader deposit adequate funds to comply with the S.E.C.'s rules. Failure to do so can result in the broker closing that account.
So Bill has a choice. He can come up with the $20,000. Or, he can contact his broker, apologize on bended knee, and promise that it will never happen again. The broker will often forgive the first offense. But not the second one.

So, if you're new to day trading, then read the fine print. You can still day trade with less than $25,000.  You just cannot do it more than three times in a five-day period.