What is day trading?
Opening and closing the same position, on the same trading day, is considered a day trade. There are rules to be aware of when day trading in a cash account vs a margin account.
Cash account rules
A user is allowed to make purchases without limit as long as settled funds are used for such purchases. Any or all of the purchases may be sold the same day but proceeds from such sales may not be used for further purchases until the following trading day.
There are several potential violations of Regulation T, outlined below, which investors operating in a cash account should be aware of.
Good Faith Violations
A Good Faith Violation occurs when you purchase a security and subsequently sell it prior to having paid for the initial purchase with settled funds.
If you incur three Good Faith Violations within a 12-month period, your account will be restricted for a 90-day period. During this time, you will only be able to purchase securities with fully settled funds.
Cash Liquidation Violations
A Cash Liquidation Violation occurs when you purchase a security and pay for it by selling fully paid securities after the purchase date. This is a violation because industry regulations require you have fully settled funds available to pay for the security purchase upon settlement.
If you incur three Cash Liquidation Violations within a 12-month period, your account will be restricted for a 90-day period. This means you will only be able to purchase securities with fully settled funds.
Free Riding Violations
A free riding violation occurs when you purchase a security and pay for the transaction by selling the same securities. This constitutes a violation of Regulation T as the stock is not fully paid for prior to selling it.
If you incur even 3 Free Riding Violations within a 12-month period, your account will be restricted for a 90-day period. This means you will only be able to purchase securities with fully settled funds.
Margin account rules
Margin accounts allow investors to (theoretically) avoid settlement to trade more frequently. If an investor exceeds 3-day trades in a rolling 5-business-day period, the account will be labeled as a Pattern Day Trader (PDT) account. (See next section for more detail on Pattern Day Trading)
Note: There are additional risks associated with margin that investors should take into account before applying for this account type. Check out the FINRA website for more information.
Pattern Day Trader (PDT)
A pattern day trading account is any margin account that has placed more than 3-day trades in a rolling 5 business day period. Once a margin account is labeled PDT, an investor will be able to continue day trading as long as the account value begins the trading day with $25,000 or more in account value (value includes any cash or securities held in the account).
If the account begins a trading day below $25,000, no day trading will be permitted without incurring a 90-day restriction.
Please note, Gatsby does not endorse day trading. Click here to learn more about day trading.