Confusing -- The Rules for Day Trading CONFUSING ! ! ! - By: vlcarticle

The formulas for day trading are oftentimes bewildering and misunderstood. This article endeavors to clear things up.

Introduction
The most important rule regarding day trading of stocks in the United States is regarded as the Pattern Day Trader (PDT) rule. Accepted by the SEC, this rule states that you may only carry out three day trades in a spread out five-business-day period if the investor has less than $25,000 in a cash or margin account. Nevertheless, if the investor has more than $25,000 in a margin account, there will not be any legal limit on the number of day trades you may make.

Description of Day Trading
Day trading is the buying and selling (or shorting and covering) of similar security on the same day.

Punishment for Disregarding the Rule
The day trader will be flagged as a Pattern Day Trader from the brokerage for that account. Your account will be frozen (no new positions will be added) for 90 days or at the time you deposit sufficient amounts of cash to get your account value above the $25,000 minimum level, whichever comes sooner. Many brokerages will warn you ahead of time when you are about to be flagged as a PDT, however others will not, therefore be cautious if you trade a lot!

If you broke this rule unintentionally and you have no designs of being a day trader, you would have the choice of informing your brokerage of the situation and they have the capacity to remove the PDT flag from your account.

Why Do They Have This Rule?
The goal of this rule is to take care of beginners and many with little cash from engaging in risky trading activities that might lead to big losses in a small amount of time.

Example 1: Safe from PDT Rule
1. Monday: Buy and Sell MSFT
2. Tuesday: Buy and Sell GOOG
3. Wednesday: Buy and Sell F
4. Next Monday: Buy and Sell GM
Result: 3 trades in a 5-day period

Example 2: Violation of PDT Rule
1. Thursday: Buy and Sell MSFT
2. Friday: Buy and Sell GOOG
3. Monday: Buy and Sell F
4. Tuesday: Buy and Sell GM
Result: 4 trades in a 5-day period

Settlement in Three Days
There are many other federal laws that influence day trading, and the settlement period is one of them. At any time you purchase or sell a position, it takes up to three days for the trade to settle. This is similar to a check taking a few days to approve at your bank. In the three days after a transaction, your brokerage may or may not allow you to trade utilizing the funds from that transaction, seeing that it has not yet settled. This constraint only happens to cash accounts . The way to get around this problem is to not spend all of your funds on one trade. This will guarantee you always have extra settled funds to trade with. Assuming that you possess a margin account, your brokerage will lend you the funds while the settlement time so that you will not have to wait before you trade again.

About the Author

Nicholas Swezey is the creator of the free stock market game on his site, HowTheMarketWorks.com

Article Directory Source: http://www.articlerich.com/profile/vlcarticle/55473

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