Can I Buy and Sell Stocks on the Same Day?

Buying and selling stocks within the same trading day is possible, but specific regulations and account structures govern these activities. Understanding these frameworks is important for anyone considering frequent short-term trading. These rules help manage risk and ensure market stability.

What is Day Trading?

Day trading involves purchasing and selling the same security within a single trading day, or selling and then buying it back before market close. The primary goal is to profit from small price movements during the trading session, contrasting with long-term investment strategies that hold positions for weeks, months, or years. Day traders often close all positions before market close to avoid overnight risks from price gaps due to news or events. This strategy applies to various financial instruments, including stocks, options, and exchange-traded products. Common techniques include scalping, which aims for many small profits, or momentum trading, which capitalizes on short-term trends.

Pattern Day Trader Designation

The Financial Industry Regulatory Authority (FINRA) designates an individual as a “Pattern Day Trader” (PDT) if they execute four or more day trades within five consecutive business days. This applies if day trades constitute over six percent of total trades in a margin account during that period. Once classified as a PDT, an account must maintain a minimum equity of $25,000 in a margin account on any day the customer day trades. This equity, a combination of cash and eligible securities, must be present before trading begins. If the account balance falls below this $25,000 threshold, the trader will be restricted from further day trading until the account is restored. Brokers may issue a “day trading margin call” if the equity drops, requiring funds to be deposited and remain in the account for two business days. Failure to meet such calls can lead to further trading restrictions, potentially limiting an account to liquidating trades only for up to 90 days.

Margin and Cash Account Trading

Day trading rules differ based on the type of brokerage account. Margin accounts permit investors to borrow funds from their broker to purchase securities, which can amplify both potential gains and losses. The “Pattern Day Trader” rules, including the $25,000 minimum equity requirement, primarily apply to these margin accounts. Conversely, cash accounts require all transactions to be made with available, fully owned funds. Day trading in a cash account is possible, but it is not subject to the PDT rules because no borrowed money is involved. However, cash accounts face limitations related to the settlement of funds from sales.

Stock Settlement Rules and Violations

Stock transactions in the United States operate under a “T+2” settlement rule, meaning funds from a stock sale require two business days to clear and become available for new purchases. For example, if a stock is sold on Monday, the funds from that sale will typically settle by Wednesday. This settlement period significantly impacts trading activities, particularly within cash accounts. Trading with unsettled funds can lead to specific violations, such as a “good faith violation” or “free riding.” A good faith violation occurs when a security is bought with unsettled funds and then sold before the initial purchase has fully settled. For instance, if you sell stock A, then immediately use those unsettled proceeds to buy stock B, and then sell stock B before the funds from stock A’s sale have cleared, a good faith violation may occur. “Free riding” happens if an investor buys and sells a security without having paid for the initial purchase in full. This often involves using the proceeds from an immediate sale to cover the cost of the original purchase, violating federal regulations. Incurring three good faith violations within a 12-month period in a cash account can result in a 90-day restriction, allowing purchases only with fully settled cash. A single free riding violation can also lead to a 90-day account freeze, limiting trading to settled funds.