Technical Day Trading Rules
Computerized trading has brought about changes to the way stocks and other investment vehicles are traded. What used to involve calling a broker for every trade is now completed with just a few clicks of a mouse. Because investment activities are easier, multiple trades can be executed in seconds. This reality has produced a new class of investors called day traders. Because of the rapid growth of this type of investor, the Securities and Exchange Commission (SEC) has adopted rules to govern day trading activities.
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Definition
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The SEC defines a day trader as somebody who buys and sells stocks or other investment vehicle on the same day. Often a large amount of stock positions are opened and each position is owned for only hours, minutes or even seconds with the hopes of profiting on the volatility of an investment. During a normal day, many investments will lose money but success rests in finishing the day with more profit than loss.
Pattern Day Trader
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The SEC requires stock brokers to hold day traders to certain rules. For this reason, a trader taking part in activities indicative of a day trader makes them responsible for day trading rules. A person who makes four or more trades within a 24-hour period in a five-day week, provided it is more than six percent of the total account balance is a labeled a day trader and must follow day trading rules.
Balance Requirements
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The SEC requires all day traders to have a margin account with a broker. A margin account is similar to a short-term bank loan where the investment broker loans the investor funds that may be invested. Further, the day trader must have at least $25,000 of cash in her account at all times.
Margin Rule
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Day traders often end their trading day without any open investment positions. This is because a closed market doesn't afford the day trader any control of their stock positions. For this reason, the SEC requires that there always be enough available funds in their account to cover at least 50 percent of their largest investment. This prevents the investment broker from being at financial risk during the day trader's activities.
Funding Rule
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If a day trader's trading activities cause him to fall below the minimum margin requirements, the broker will ask for money to be deposited into the account. The SEC requires that any money deposited into an account to meet margin requirements must remain in the trader's account for at least two business days.
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