Day Trading Rules for the Stock Market
Stock market regulations use the term "pattern day trader" to describe an investment account that falls under the day trading rules. A day trade occurs when a stock trade is opened and closed in the same market trading day. Financial Industry Regulatory Authority -- FINRA -- rules state an account will be designated as a pattern day trader if day trading occurs in the account four or more times in five business days.
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Account Type
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Stock market day trading must be done in a stock brokerage margin account. A margin account allows investors or traders to borrow money from the brokerage firm to pay for a portion of purchased securities. Selling stocks short can only be done in a margin account. Day trading in a cash account is prohibited because of violation of other FINRA regulations. IRA accounts are always cash accounts, so a brokerage IRA cannot be used for day trading.
Capital Requirements
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A pattern day trading account must maintain minimum trader capital of $25,000. This amount can be in cash or security equity. If the trader's capital in the account falls below $25,000, the account is restricted from any day trading until more money is deposited and the value is brought above the $25,000 level, as of 2011. An active day trader should keep his account equity above the minimum level to avoid losing any trade positions and lock the account from further day trading.
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Margin and Buying Power
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A pattern day trading account is allowed to buy securities for day trading with a 25 percent margin requirement. This margin level allows the day trader to hold up to four times the account equity in security value during the market day; therefore, the buying power is doubled of a regular margin account. If a day trading account exceeds the four times margin level, the account will receive a margin call to deposit more cash and the account will be restricted to two times buying power until the deposit is made into the account. If the day trader fails to meet the margin call, the account will be restricted to cash trading for 90 days.
Restricted Cash
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Equity or cash used to support the buying power in a day trading account cannot be withdrawn from the account for two trading days after it is used to support margin trading. For example, a trader has equity of $50,000 and each day trades up to the four times limit of $200,000 in open trades. She wants to withdraw $10,000 from the account. For the next two days, she must limit her day trading level to $160,000 -- four times $40,000. After the two days of trading at the lower level, the unused $10,000 in equity can be withdrawn.
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References
- Photo Credit stock exchange image by Christopher Walker from Fotolia.com
