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I Think I’m a Day Trader

Oct. 2, 2012
Brokers, Investing
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Have you ever wanted to be a day trader? It probably wasn’t your childhood dream, but many people quite enjoying day trading as a hobby, and sometimes as a career.

If you’re an active trader, you should be aware of what the qualifications are to become a day trader; you might qualify as one without even knowing. While this may seem like a simple change of title, it would also mean that you’d have to comply with special regulations designated by the SEC and FINRA.

Am I a Day Trader?

If you purchase and then sell (or sell then purchase) the same security in a single day, then you have made a day trade. It doesn’t matter whether the security is a stock or option.

The SEC and FINRA consider you to be a pattern day trader if you make 4 or more day trades within a period of 5 business days AND if the number of day trades made is greater than 6% of all trades made in from account within that 5 business day period.

This is the minimum qualification to be considered as a pattern day trader. Some brokers have their own qualifications, so you should consult with your broker to see if you would be designated as such.

Are You an Exception to the Rule?

According to the SEC, the following situations would not be considered day trades:

  • a long security position held overnight and sold the next day prior to any new purchase of the same security
  • a short security position held overnight and purchased the next day prior to any new sale of the same security

For example, let’s say that Joe decided to buy ten shares of Apple on Tuesday. If Joe sold all of those shares on Wednesday, before purchasing any more shares of Apple, then Joe has not made a day trade. On the other hand, Julie bought ten shares of Apple on Thursday, sells half of those shares on Thursday afternoon, and sells the last five shares Friday; Julie made a day trade.

What Happens if I Am a Day Trader?

Don’t worry, there’s no penalty. There are two simple restrictions that you have to abide by, to be compliant with FINRA:

  • You must maintain at least $25,000 worth of equity in each of your accounts
  • You can only trade in margin accounts

However, be aware that your broker may impose greater restrictions in terms of minimum account size or maximum margin. And your broker has the freedom to designate you as a pattern day trader, even if they only suspect that you will be one in the future.

Tips from a trader: Just because you’re trading in a margin account, doesn’t mean that you should use margin. Most people never trade on margin because they have no need for it. Not only does trading on margin increase your risk, but it can significantly increase the amount of money that you pay your broker each month (every loan has interest).

How to Save Money When Day Trading

Day trading can become expensive very quickly. You have to take into account the purchase price of stocks, the possibility that your investments will not go well, interest rates on margin, and broker commissions.

When most people try to find the broker with the lowest commissions, they focus solely on the price per stock trade. But for frequent traders, the greater cost is usually the price per options trade. If you don’t calculate this ahead of time, you could end up spending thousands of dollars per month on commissions alone.

To assist you in finding the right broker, NerdWallet searched through the 74 most popular brokerage accounts in the U.S. to find the best brokers and software platforms for day traders.

See our list of best brokers for day trading >