Day Trading Restrictions on US 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 Securities and Exchange Commission (SEC) has imposed restrictions on the day trading of stocks and stock markets. These restrictions define "pattern day traders" and require that they maintain an equity balance of at least $25,000 in their trading account.

In other words, to regularly day trade stocks in the U.S., you need at least $25,000 of your own capital in your trading account. Keep reading to learn more about when a trader becomes a pattern day trader, and what their requirements are once they receive that designation.

Pattern Day Trading

The SEC defines a day trade as any trade that is opened and closed within the same trading day. It can be a buy-to-open and a sell-to-close or a short sale closed by a buy order. If you do four or more day trades within five trading days, the SEC likely considers you a day trader.

The only exception to this rule is if the total number of day trades is no more than 6% of your total trades in that timeframe. You are only considered a pattern day trader if four or more day trades make up more than 6% of your trading activity. However, unless you're a very active swing trader, four day trades in a week will likely land you a pattern day trader designation.

Even if you only make one day trade per day, that would likely classify you as a pattern day trader, and you would be expected to meet minimum equity requirements.

Check Your Broker's Specific Requirements

The SEC sets the bare minimum requirements for day traders in the U.S. Individual brokerage firms may have more stringent definitions, so it's important to look up the details on what your brokerage expects of its pattern day traders.

For instance, a broker may define pattern day trading as making two or three day trades in a five-day period instead of four. In other cases, a broker may count certain stock and ETF positions toward the minimum equity requirement, but it doesn't count penny stocks or options. By looking up your brokerage's exact requirements, you can avoid running into issues and keep your account active for day trading.

Suspended Trading

If a trader is classified as a pattern day trader—either by the SEC or at a broker's discretion—they will be expected to maintain their equity balance requirements (at least $25,000). If a 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.

It's important to consider any open swing or long-term positions in your account while day trading. If you're busy day trading and not aware that your other investments are losing value, you could end up below the equity requirements without realizing it.

Leverage or Margin

Day traders in the U.S. are allowed to use up to 4-to-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-to-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.

Alternatives to Minimum Equity Requirements

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 may set deposit minimums and margin requirements on each asset. The same goes for cryptocurrencies like Bitcoin.

If a trader has at least $25,000, then all markets—including the stock market—are a viable option for day trading.

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, forex, or crypto markets, which are also viable day trading markets.

While there aren't legal requirements, a trader may want to ensure that they have at least $5,000 to $7,500 (preferably more) in starting capital before trading futures. For forex day trading, a trader may want to have at least $500 (but preferably $1,000 or more) in initial trading capital.

Frequently Asked Questions (FAQs)

What happens if you break pattern day trading rules?

When you fall below the $25,000 minimum balance for day trading, you won't be allowed to trade until you deposit more into your account. If you exceed your current leverage, your brokerage will issue a margin call giving you five days to deposit enough to cover the trade. If you do not meet this margin call on time, your leverage will begin to decrease.

What is the rationale for pattern day trading rules?

These rules were implemented by FINRA, the Financial Industry Regulatory Authority, after surveying brokerage firms to determine the necessary cushion to hedge against the risk involved in day trading. These rules are only minimums, too. Some firms impose more stringent restrictions on day traders.