Day Trading Restrictions on U.S. Stocks

What You Need to Know to Day Trade

Because the stock market is an auction made up of buyers and sellers (including individuals, corporations, mutual funds, and more) of shares of publicly traded companies, fluctuations in stock prices is nothing out of the ordinary. In fact, the price of company’s stock can vary drastically from one day to the next. Before adding shares of stock to your portfolio, it is important to understand what causes stock market fluctuations and its risks.
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The U.S. Securities and Exchange Commission (SEC) has imposed restrictions on the day trading of U.S. stocks and stock markets. These prevent "pattern day traders" from operating unless they maintain an equity balance of at least $25,000 in their trading account. That means, to regularly day trade stocks in the U.S., you need at least $25,000 of your own capital in your trading account.

Pattern Day Trading

The SEC defines a day trade as any trade that is opened and closed within the same trading day. They define pattern day trading as four or more day trades within five trading days, assuming that the number of day trades is more than 6% of the total trades taken in the five-day period. This percentage stipulation isn't a factor most of the time—if you are making four or more day trades in a five-day period, you will likely be classified as a pattern day trader and subject to the $25,000 equity balance to day trade.

In other words, even one day trade per day would classify the trader as a pattern day trader, and the capital restrictions would then apply.

Individual stockbrokers may have more stringent definitions. A broker may define pattern day trading as making two or three day trades in a five-day period, and the brokerage may impose the $25,000 minimum equity balance on these kinds of traders. In this case, the trader will need to maintain that balance if they wish to make any day trades. It's best to check with your broker on day trading restrictions.

Suspended Trading

If a trader is classified as a pattern day trader according to the SEC definition—or by a broker's discretion—and the trader does not have the required $25,000 equity balance in their account, they will be prevented from making further day trades. Day trades will remain unavailable until the equity balance in the account is increased to $25,000. Day traders are only required to have the $25,000 balance on the days that they day trade.

Leverage or Margin

Day traders in the U.S. are allowed to use up to 4:1 leverage. That means that if a day trader deposits $30,000 in their account, they can accumulate positions up to $120,000. Traders that hold positions overnight are only allowed to use up to 2:1 leverage.

Day traders are allowed to have more leverage since their positions are short-term, and therefore each trade is likely to experience smaller price swings compared to positions held for days, weeks, or years.

If a trader exceeds their allowed margin (for example, if a losing position causes their deposited capital to drop), then the day trader will be issued a margin call.

Other Markets

The $25,000 equity balance restriction applies only to U.S. stock markets. The day trading restrictions on other markets vary. The U.S. futures and currency markets don't have set equity balance requirements for day trading, but brokers will set deposit minimums and margin requirements on each asset. Therefore, if a day trader has at least $25,000, all markets—including the stock market—are a viable option.

Day traders with less than $25,000 in capital will need to acquire more capital to day trade the stock market. Alternatively, they can participate in the futures or forex markets, which are also viable day trading markets. To day trade futures, it is recommended that a trader has at least $5,000 to $7,500 (preferably more) in starting capital. For forex day trading, it is recommended that a trader have at least $500 (but preferably $1,000 or more) in initial trading capital.

Article Sources

  1. U.S. Securities and Exchange Commission. "Pattern Day Trader." Accessed June 11, 2020.

  2. U.S. Securities and Exchange Commission. "Margin Rules for Day Trading." Accessed June 11, 2020.

  3. FINRA. "Day-Trading Margin Requirements: Know the Rules." Accessed June 11, 2020.

  4. Ally. "Day Trading Rules & Leverage." Accessed June 11, 2020.