If you’re looking to get into the world of day trading, you need to be aware of the Pattern Day Trader rule. This rule stipulates that in order to day trade stocks, you must have $25,000 in your account. Let’s take a closer look at what this means for aspiring traders and how you can go about meeting these requirements.
What is the pattern day trader rule?
The pattern day trader rule is a regulation put in place by the U.S. Securities and Exchange Commission (SEC) in 2001. The rule stipulates that investors who make more than four day trades in a five-day period are considered pattern day traders and must maintain an account balance of at least $25,000.
The purpose of the rule is to protect investors from excessive risk-taking by limiting the number of day trades that can be made without having a significant amount of capital to back up those trades.
Why is the $25,000 requirement in place?
The $25,000 requirement is in place because day trading is a high-risk activity. By limiting the number of day trades that can be made without having a large account balance, the SEC is hoping to protect investors from blowing through their entire account on high-risk trades.
What happens if you don’t meet the $25,000 requirement?
If you don’t meet the $25,000 requirement, you will be limited to making three day trades in a five-day period. This limit will be placed on your account for 90 days or until you can bring your account balance up to $25,000.
How can you meet the $25,000 requirement?
The first thing to note is that the $25,000 requirement is for your account equity, not including margin. So, if you have a $30,000 account and use $5000 of it as margin, you would still need to have at least $25,000 in equity in order to day trade. This rule is in place to prevent investors from using too much leverage and taking on excessive risk.
There are a few different ways that you can meet the $25,000 equity requirement. The first is to simply deposit enough money into your account to meet the minimum. If you don’t have $25,000 to deposit, you can try to day trade your way up to the minimum. This will obviously be a lot more difficult, but it is possible.
Another option is to find a broker that will allow you to trade with less than $25,000 in your account. While these brokers do exist, they are few and far between. And even if you do find one, they will likely charge you higher commissions and fees to offset the risk they’re taking on by allowing you to trade with less capital.
Which brokers allow day trading with less than $25,000?
Some brokerages allow pattern day traders to use leverage to meet the $25,000 equity requirement. For example, Robinhood offers margin accounts with 0% interest and no account minimums. So, if you open a Robinhood account and deposit $2000, you could trade with $4000 in your account.
While this might sound like a good option, it’s important to remember that using leverage is a risky proposition. If the stock market takes a turn for the worse, you could easily find yourself owing your broker more money than you have in your account. So, while it is possible to day trade with less than $25,000 in your account, it’s not recommended.
The bottom line is that if you want to day trade stocks, you need to be aware of the pattern day trader rule and make sure that you have at least $25,000 in your account.
While this may seem like a lot of money, it’s actually not that difficult to meet this requirement if you’re dedicated to trading. And, once you do, you’ll be able to take advantage of the many opportunities that day trading has to offer.