What Is Initial Funding for Day Trading?
Stock market day trading is the buying and selling of stock market securities and holding them for less than one day, often only for minutes. Day traders borrow money from their brokers to leverage the profits on their trades. Day traders have extra restrictions concerning the funding of their accounts and also have additional leverage capability.
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Identification
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The Financial Industry Regulatory Authority (FINRA) defines "pattern day trader" as any stock market trader who places 4 or more buy and sell trades per day in any 5 day period. A trader who meets these criteria must follow the day trading account restrictions.
Requirements
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A pattern day trader is required to keep a minimum of $25,000 equity level in her account. Equity can be in the form of cash or marketable securities. Most day traders close out their positions by the end of the trading day, so the account value must be at least $25,000 to start the next trading day.
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Leverage
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Day traders are allowed to leverage the equity up to four times. A trader with $50,000 in equity could hold up to $200,000 in securities during the trading day.
Considerations
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If the equity in a trader's account falls below $25,000, a margin call will be made by the broker and the trader has 5 days to deposit additional cash. During that time, leverage is limited to two time equity and if the margin call is not met, the account will be restricted to cash-only trading for 90 days.
Time Frame
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Funds used to meet the minimum equity requirements must remain in the account for two business days before it can be withdrawn. This means a trader using his maximum leverage will not be able to withdraw money until he reduces his trading level for at least two days.
Warning
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The Securities and Exchange Commission warns that day traders should be ready for "severe financial losses." A day trader starting with the minimum of $25,000 will soon be out of day trading as any losing day will put the account equity below the required minimums.
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