Limitations of Online Stock Trading
Between 2000 and 2010, stocks earned investors just over 1 percent per year. During that same period, stock prices rose as much as 100 percent two separate times after severe market declines. In a market environment prone to volatility, trading stocks can be an attractive alternative to long-term investing. Trading stocks can also be very risky, and as a result many traders end up losing money.
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SEC Warning
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The U.S. Securities and Exchange Commission (SEC) is a government agency charged with regulating the financial markets. The SEC considers trading to be an extremely risky alternative to investing. In fact, they have dedicated a page on their website to warning traders that they can suffer large financial losses, and urge people to never trade money they cannot afford to lose.
Random Walk Theory
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Random Walk Theory was proposed by Burton Malkiel in 1973, and according to Stockcharts.com is accepted by many financial professionals. Malkiel argued that it is mathematically impossible for speculators to outperform the market averages, such as the S&P 500 or NASDAQ. He went to great lengths to show that there is no valid evidence supporting the idea that various types of analyses can predict future price direction consistently enough to profit from trading activity.
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Pattern Day Trading
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The SEC has established special rules that are applied to the brokerage accounts of anyone who exhibits pattern day trading behavior. Your brokerage account will be flagged as a pattern day trading account if at any time you buy and sell the same stock in a single day four or more times in five business days. If your account is flagged, you will be required to meet special criteria in order to make any additional stock trades.
Pattern Day Trading Requirements
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Pattern day traders must have at least $25,000 in their trading account. If your account is flagged and you do not have this much money in it, you will be given five days to add funds to meet this requirement. If you cannot, your account will be restricted from trading activity. In addition, day traders have special margin restrictions. Margin is money you can borrow from your broker to increase your buying power. Day traders are limited to four times their buying power.
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References
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