How Much Money Do You Need to Start Day Trading?
Different brokers have different requirements on minimum initial equity capital for security trading. For a cash account fully funded by a customer's own money, the minimum initial equity can be set low. In a margin account partly funded by the broker with customer borrowing, the minimum initial equity would be set high. A margin account that involves day trading requires even higher initial equity. The additional amount of capital is to protect a broker when potential trading losses have been increased due to day traders or trading with borrowed money in general.
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Definition
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The most trading risk is often inherent with day trading. Day trading literally means to buy and sell a security in the same day. Regardless of price movements, day traders execute their intended orders by the end of a trading day. Predicting price change becomes highly unreliable over one day. For the purpose of setting minimum initial equity capital, an account is considered a day-trading account when the customer has established a pattern of day trading four times or more in five business days.
Minimum Equity
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Day trading can be initiated only from a margin account. While minimum equity requirements for a margin account not coded as a day-trading account is $2,000, a customer needs $25,000 in order to start day trading, according to federal regulation. Furthermore, a day trader must maintain the minimum equity level prior to any day-trading activities. If the amount of equity in the account falls below the $25,000 level due to price declines, no day trades are permitted until additional funds are deposited to bring back the equity level to the minimum requirement.
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Margin Requirements
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Day trading mostly involves using borrowed money to trade on margin. In security trading, a margin means the amount of available funds provided by the broker in excess of the required amount of equity capital. Or alternatively, a margin is the percentage of equity capital relative to the total account value. There are two types of margins: initial margin and maintenance margin. Based on federal Regulation T, the required initial margin is 50 percent, meaning when purchasing a security, half of the total purchase funds must be money from the customer and the other half can be borrowed from the broker. Maintenance margin for day trading is normally 25 percent , allowing total account value to be four times the equity amount at any given time.
Margin Call
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In addition to meeting the minimum amount of equity requirement, day traders trading on margin must also honor their broker's margin requirements. While the initial margin is set at the time of security purchases, the maintenance margin shall be maintained throughout when securities are held in positions. In time of market downturns, when the amount of equity capital drops below the required maintenance margin, the broker issues a margin call requesting the customer deposit more funds to bring the level of equity capital back to the percentage point specified in the maintenance margin.
Major Benefit
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While sale of securities takes three business days to settle, any sales proceeds are credited to a customer's account immediately but considered as unsettled funds only, before the three settlement days elapse. Customers can use unsettled funds to buy new securities but usually cannot sell them before the funds' settlement date unless they deposit additional funds equal to the amount of unsettled funds. However, day traders are given the privilege to make ongoing trades irrespective of the security settlement restriction, which saves them from having to make additional capital commitment.
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