How to Day Trade Stocks with Less than $25,000
You need $25,000 to day trade stocks...but you have other choices.
The Financial Industry Regulatory Authority (FINRA) in the U.S. established the "pattern day trader" rule, which states that if a stock trading customer makes four or more day trades (opening and closing a stock position within the same day) in a five-day period the customer is considered a day trader and must maintain a minimum $25,000 account balance.
Mechanics of the Pattern Day Trader Rule
Back in 1974, before electronic trading, the minimum equity requirement was only $2,000. New technology changed the trading environment, and the speed of electronic trading allowed traders to get in and out of trades within the same day.
Since day traders hold no positions at the end of each day, they have no collateral in their account to cover risk and satisfy a margin call during a given trading day if they have no enforced minimum equity requirement. Brokerage firms wanted an effective cushion against margin calls, which led to the increased equity requirement.
Perhaps you don't actively day trade, but happened to do four or more trades in one week, with no trades the next or following weeks. In this scenario, your trading firm would still likely code you as a day trader and hold you to the $25,000 equity requirement going forward.
You can meet the equity requirement with a combination of cash and eligible securities, but they must reside in your day trading account at your brokerage firm, rather than in an outside bank or another firm.
On the plus side, pattern day traders that meet the equity requirement receive some benefits, such as additional leverage. A stock day trader can trade with 4:1 leverage; typical stock traders (swing traders and investors) can only trade with up to 2:1 leverage.
Trading Stocks with Less than $25,000
If you don't happen to have $25,000 to day trade, can you get around this somehow? Yes, consider taking advantage of the following loopholes and strategies.
If you only want to day trade the stock market you still have a number of options if you don't have $25,000. Aside from stocks, consider day trading an alternative market as your best backup option, since these other markets provide favorable conditions to day traders.
- Since a pattern day trader is someone who makes four or more intraday trades in a five-day period, you can make three day trades in a five-day period and not be subject to the $25,000 minimum. That's less than one day trade a day, which isn't ideal for a day trader. The only benefit to this approach is that you won't over-trade. The drawback is that you need to pick and choose between valid trade signals, so you won't receive the full benefit of a proven strategy. If you opt to go this route, consider the Daily Range Day Trading Strategy.
- Day trade a stock market outside the U.S., with a broker also outside the U.S. Not all foreign stock markets have the same account minimums or day trading rules as the U.S. Research other markets and see if they offer the opportunities for day trading that fit your needs. Consult both tax and legal professionals to understand the ramifications before considering this approach.
- Join up with a day trader firm. The structure of each firm varies, but typically you deposit an amount of capital (much less than $25,000) and they provide you with capital to trade, with your deposit safeguarding them from losses you may take. Otherwise, the firm simply leverages your capital. For more on day trading firms and getting hired, see Day Trading as a Career: Don't Make These Resume Mistakes.
- Day trade using a cash account with no margin. If you have, say, $5,000 in your account, you can do stock trades with only that capital and use no margin so that you won't be subject to the pattern day trader rule. This method has a few downsides, though. You won't be able to short any stocks. If you want to day trade options, you can't sell naked options with this account. You'll only be able to buy puts and calls and sell covered options. The settlement time for trades creates another hurdle for cash-only day trading. Trades usually clear within two days after the actual day the trade took place, and you'll violate Regulation T if you try to do additional trades with cash from trades that haven't yet settled. With limited available cash in your account, you might not have enough funds to make your desired trades each day.
- Do swing trading and enter trades that you hold for longer than one day. Swing traders capture trends that play out over days or weeks, rather than attempting to time a one-day trend that might last for 20 minutes. While this is less a loophole and more of a change in strategy, it works for traders who want to stay actively involved but don't yet have enough equity to meet the $25,000 requirement for day trading.
- One less attractive choice is to open multiple day trading accounts with different brokers. For example, if you open two accounts you can make six day trades in a five-day period: three trades for each broker. This is less attractive because if you already have limited capital each account is likely to be quite small and day trading with such small accounts isn't likely to produce much income. With small amounts of capital in each account, you are severely limited in the types of stocks you can trade, and some brokers may not even accept the small deposit.
Brokers are out to protect themselves and can impose minimum capital restrictions at their discretion if they believe someone is day trading regularly (even if below the four trade/five-day threshold), or trading in a risky manner. Therefore, day trading stocks with less than $25,000 isn't recommended. Instead, trade markets that welcome day traders and require far less capital.
An Alternative: Trade a Different Market
This section provides a basic summary of each market, and the recommended minimum capital to get you started day trading.
- The forex market trades 24 hours a day during the week. This is where you can trade the world's currencies, such as U.S. and Canadian dollars, and the Euro. Think forex is confusing? Here's what you need to know. With forex trading, consider starting with at least $500, but preferably more. The forex market offers leverage of 50:1 (this varies by broker), so a $500 deposit means you can trade and earn, or lose, on $25,000 of capital. Profits and losses mount quickly.
- The futures market is where you can trade stock index futures (S&P 500 E-mini for example) and commodities (such as gold, oil, and copper). Futures are an inherently leveraged product, in that a small amount of capital, such as $400 or $500 the in the case of the S&P 500 E-mini contract, gives you a one-contract position in a product that moves 10+ points a day, where each point is worth $50. Profits and losses pile up quickly. It's recommended futures traders start with at least $2,500 (if trading a contract like the S&P 500 E-mini), but that will vary based on risk tolerance and contract(s) traded. See Capital Required for Day Trading Futures for more details.
- Day trading the options market is another alternative. Options are a derivative of an underlying product (such as a stock), so you don't need to pay the upfront cost of the stock. Instead, you pay (or receive) a premium for participating in the price movements of the underlying. The value of the option contract you hold changes over time as the price of the underlying fluctuates. What type of options you trade will determine the capital you need, but several thousand dollars can get you started.
If you have less than $25,000 you can still day trade. It just shouldn't be in the stock market, though. The stock market is capital intensive and provides minimal leverage. Almost all day traders are better off using their capital more efficiently in the forex or futures market. These markets require far less capital to get started, and even several thousand dollars can start producing a decent income in these markets.