SEC Stock Trading Restrictions
The Securities and Exchange Commission, or SEC, is the government agency charged with regulating the financial markets and those participating in them. The SEC has established special rules for those they consider pattern day traders. If you make four or more trades in a five-day period, your broker will flag your account as a pattern day trader. If your account is flagged, your account will be subject to certain restrictions.
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Account Requirements
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Pattern day trading accounts must be funded with a minimum of $25,000. If your account has less than $25,000, or if it falls below that level, it will be restricted and you will not be able to day trade. This does not mean you will not be able to buy and sell stock, but if you try to make four trades in a single week, you will likely see an error message on your brokerage account informing that you have reached your trading limit for the week.
Margin Restrictions
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Margin is money you can borrow from your broker to buy additional stock. Pattern day traders can borrow no more than four times their total account value. If you exceed this amount, your broker will issue a margin call requiring you to add money to your account or sell the stock you own in order to pay back the borrowed money.
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Meeting Margin Calls
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If you receive a margin call for your broker, you have up to five days to meet it, or pay it back. Until you pay back your broker, you will only be able to borrow up to two times your account value. Furthermore, if you don't pay back your broker by the fifth business day, your account will be restricted to just cash trades for the next 90 days.
Purpose for These Rules
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The SEC has determined that pattern day trading is an extremely risky activity. Before these rules were enacted, some brokers had preyed upon inexperienced investors, enticing them with the promise of large profits. Many traders lost money even as brokerages collected large fees from traders making a large number of trades. These restrictions are designed to keep inexperienced traders from taking risks they do not fully understand.
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References
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