What Is the Precise Definition of a Round Trip Stock Trade?

Round trip stock trading is one method that companies use to deceptively increase income. It is also a method used to show an increase in volume in a thinly traded stock. Most of the time, round trips occur when the person is a day trader. The round trip rule is supposed to protect the small investor. If you want to be a day trader, you need to learn these rules and regulations.

Significance

If you buy and sell a stock in a five-day period, that is one round trip. If you make four round trips in one market week, you are a pattern day trader and subject to certain rules. If you have more than $25,000 in your account, there is no problem. In addition, if you trade a lot but the round trips only constitute 6 percent of your trades, you're still in good shape.

Warning

Watch out if you buy the same stock four times in one week and sell it all in one trade in the five-day period. Even though you only have one sale, it counts as four round trips. This again subjects you to the pattern day trader rules, a frozen or closed account if it is your second offense.

Prevention/Solution

Put at least $25,000 into your account and you don't have to worry about the brokerage house freezing it. If your account drops, you have five days to make up the difference in cash so that it reaches $25000. In fact, if they do freeze the account, as soon as the money goes in, your account is available for trading. If your account drops below $25000, you have a margin call that requires you put in the difference. In order to avoid a freeze, make sure that the value of your account is several percent higher than that amount to adjust for the price change in the equities. You can't use a cross guarantee to fulfill the obligation and the amount of money needs to remain in the account at least two days.

Considerations

Consider your automatic trades in your count. You might believe that you won't be a pattern trader if you only do three in a week, but if you have a stop loss order that triggers on a newly purchased stock and already have three round trip trades. This becomes the fourth round trip trade.

Function

Understand that the SEC instituted these rules to make sure that they protected small and novice investors by controlling their day trading activities. Often the opposite occurs. Traders with smaller accounts have to limit the number of trades. If they find that they made a mistake on a purchase and they already have three round trips, they can remain in that position and lose money or they risk a freeze on their account. In order to build capital from day trading, the small investor has to make perfect selections to maximize the limited number of trades.

Identification

Look for sudden jumps in a stock volume. Round trip trading is one method that some unscrupulous traders have to increase the volume of a thinly traded share. It makes the stock look more attractive when trading is more frequent. Also note that some companies do round trip stock trades to show an increase on their revenue statement and make it more attractive to stock holders, even though it never changed the net worth of the company.