How to Follow SEC Day Trader Rules
The SEC exists to protect the stock market investor. However, with the advent of electronic trading platforms and instantaneous trade executions, there are investors out there who wish to take incredible risks and make trades that would never be recommended by a traditional broker. Hence, special SEC rules have been created exclusively for the day trader.
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Things You'll Need
- $25,000 in a margin account
- Copy of New York Stock Exchange day trading information memo
Instructions
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Define your trading style. If you tend to both buy and sell the same stock in a day or several times within a week, you are considered a "pattern trader" by the SEC and are subject to special rules.
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Ask yourself if you can afford to buy stocks, and lose, on borrowed money. If the answer is no, then even if you aren't a pattern trader, you may want to consider a different style of trading, such as swing trading or long-term investing.
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Keep at least $25,000 in cash or securities in your trading account if you are a pattern trader.
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Trade only from a margin account if you are a pattern, or day, trader. A margin account is one that holds a certain amount of cash or securities as collateral against speculative trades. Without a margin account worth $25,000 or more, you cannot day trade and still comply with SEC regulations.
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Follow the rules to remain in good standing with the SEC. You don't want to lose your ability to trade because of a shortage in your margin account.
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Refrain from withdrawing any amount you deposited into the margin account to cover a trade and meet your $25,000 minimum for two business days. Margin account worth is calculated as of the end of the previous business day.
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Tips & Warnings
The rules for day trader compliance are easy to follow. However, when pursuing a "hot lead," it can be tempting to trade even if your equity holdings are too low to allow you to do so and still follow the rules. Don't give into this temptation and incur the wrath of the SEC, which already looks askance at day trading.
Find a copy of the New York Stock Exchange day trading information memo (see Resources below).
Day trading can appeal to addicted gamblers. Ask yourself if you can truly afford to lose the amount of money you are trading with on any given day.
