Can You Buy and Sell a Stock the Same Day?

It is possible to buy and sell a stock on the same day, a practice widely recognized as day trading. While this can offer opportunities for quick profits, it also involves specific regulations and considerations that investors should understand. The ability to engage in same-day stock transactions, and the rules governing them, often depend on the type of brokerage account an investor uses. This article will delve into the intricacies of day trading, outlining the distinct rules for cash and margin accounts, and explaining the underlying concept of trade settlement periods.

What is Day Trading

Day trading involves the purchase and sale, or sale and purchase, of the same security within a single trading day. This strategy aims to profit from small, intraday price movements rather than long-term investment gains. Day traders typically close out all positions before the market closes to avoid the risks associated with overnight price fluctuations.

Day trading applies to a wide range of securities, including stocks, bonds, exchange-traded funds (ETFs), and options. Due to the rapid nature of these transactions, day trading is subject to specific regulatory oversight.

Rules for Cash Accounts

Trading in a cash account requires that all security purchases are paid for in full by the settlement date. If an investor buys a stock with unsettled funds and then sells it before those funds have fully settled, it can lead to a “Good Faith Violation” (GFV). These violations occur when a purchase is made without “settled funds,” which are cash or proceeds from a sale that have completed their settlement process.

For example, if an investor sells a stock on Monday, the proceeds will settle on Tuesday (assuming a T+1 settlement cycle). If they then use those unsettled proceeds to buy another stock on Monday and sell that second stock before Tuesday, a GFV occurs.

Accumulating Good Faith Violations can lead to trading restrictions. If an account receives four Good Faith Violations within a rolling 12-month period, it may be restricted to buying securities only with fully settled funds for 90 days.

A more severe type of violation is “Free Riding.” This occurs when an investor buys securities and then pays for that purchase using the proceeds from the sale of the same securities, without ever having the cash to cover the initial purchase. Free riding is a violation of Regulation T, a rule set by the Federal Reserve Board, and is considered an abuse of credit.

A single free riding violation can result in the account being restricted to using only settled cash for purchases for 90 days. During this restriction, the account cannot use unsettled sale proceeds to make new purchases.

Rules for Margin Accounts

Active traders often use margin accounts for day trading due to their flexibility. Margin accounts allow investors to borrow funds from their brokerage firm, increasing their trading power.

FINRA has established rules for frequent day trading in margin accounts, primarily through the “Pattern Day Trader” (PDT) rule. An individual is classified as a pattern day trader if they execute four or more day trades within any five consecutive business days in a margin account. These day trades must also represent more than six percent of the total trades made in the margin account during that same five-business-day period.

Once designated as a pattern day trader, the account is subject to a minimum equity balance. Pattern day traders must maintain a minimum equity of $25,000 in their margin account on any day they engage in day trading. This equity can be a combination of cash and eligible securities and must be present in the account before any day trading activities begin.

If the account’s equity falls below the $25,000 threshold, the pattern day trader will be prohibited from day trading until the balance is restored. Violating the PDT rule can lead to a margin call and a 90-day trading restriction, limiting the account to closing existing positions or purchasing with cash only.

Understanding Settlement Periods

The ability to buy and sell stocks on the same day is closely tied to trade settlement periods. Settlement refers to the official transfer of securities and cash after a trade is executed. While a trade executes instantly, the transfer of ownership and funds is not immediate.

The standard settlement cycle for most U.S. securities, including stocks, is T+1. This means that a transaction settles one business day after the trade date (T). For instance, a trade executed on Monday will settle on Tuesday.

Settlement periods directly impact cash accounts because funds from a sale are not considered “settled” until the period has passed. Using unsettled funds to make a new purchase and then selling that new position before the initial funds settle leads to Good Faith Violations.

Margin accounts can circumvent some settlement issues by allowing trading on borrowed funds or unsettled proceeds. This flexibility is, however, within their specific rules like the Pattern Day Trader requirements.