Can You Day Trade on Public.com?

Day trading involves rapidly buying and selling securities within the same day. On Public.com, understanding frequent trading rules and their application to account types is crucial. This article covers the regulatory environment, Public.com’s framework, and financial and tax implications for active traders.

Understanding Frequent Trading

Frequent trading, or day trading, involves multiple buy and sell transactions for the same security within a single day. Financial Industry Regulatory Authority (FINRA) Rule 4210 defines a “Pattern Day Trader” (PDT) as a stock trader who completes four or more day trades within five business days in a margin account. This designation applies if day trades represent more than six percent of the customer’s total trading activity during that five-day period.

Pattern Day Trader classification carries specific regulatory requirements. A primary rule mandates maintaining a minimum equity of $25,000 in the margin account on any day day trading occurs. This minimum, consisting of cash and eligible securities, must be present before trading begins. If equity falls below $25,000, day trading is restricted until the account is restored. The rule also includes a 90-day look-back period for determining PDT status. FINRA’s rules aim to mitigate risks associated with highly leveraged and frequent trading.

Public.com’s Investment Environment

Public.com is an investment platform offering various opportunities. It facilitates commission-free trading for stocks and Exchange Traded Funds (ETFs) during standard market hours. Public.com also provides access to fractional shares. The platform differentiates itself by not engaging in payment for order flow (PFOF) for equities, routing orders directly to exchanges.

Public.com offers various account types. Users can open standard brokerage accounts, including cash and margin accounts. It also supports Traditional and Roth IRAs, and provides access to bonds, options, and cryptocurrency. Account holders can also opt for a high-yield cash account and a Treasury account for direct investment in Treasury bills.

Executing Frequent Trades on Public.com

Frequent trading on Public.com depends on the account type and adherence to regulatory requirements. Day trading in a Public.com cash account is limited by settlement times. As of May 28, 2024, the U.S. stock market operates on a T+1 settlement cycle, meaning transactions settle one business day after the trade date. Funds from a stock sale are not fully available until the next business day. Multiple round-trip trades (buying and selling the same security) in a cash account before funds settle can lead to a “free-riding” violation, resulting in account restrictions for up to 90 days.

Margin accounts on Public.com offer more flexibility for frequent trading, provided PDT requirements are met. Pattern day traders can access increased buying power, typically up to four times their maintenance margin excess from the previous day’s close. Exceeding this buying power can lead to a margin call, which must be met within a few business days, or the account may face further trading restrictions, potentially limiting activity to a cash-only basis for 90 days. Public.com monitors trading activity and applies FINRA rules.

Financial and Tax Aspects of Frequent Trading

Frequent trading on Public.com involves financial and tax implications. Beyond the regulatory $25,000 minimum for pattern day traders, active traders should maintain more capital. This helps absorb potential losses, cover fees, and provide a buffer during market volatility, reducing impulsive decisions.

Profits from frequent trading are typically classified as short-term capital gains. These gains arise from the sale of assets held for one year or less. These gains are taxed as ordinary income, subject to an individual’s regular income tax bracket (10% to 37%). This contrasts with long-term capital gains, which apply to assets held for over a year and are often taxed at lower, more favorable rates.

Frequent traders must also be aware of the wash-sale rule, an IRS regulation preventing artificial losses. A wash sale occurs when an investor sells a security at a loss and repurchases the same or a “substantially identical” security within 30 days before or after the sale date. If a wash sale occurs, the loss cannot be immediately deducted for tax purposes. Instead, the disallowed loss is typically added to the cost basis of the newly acquired security, potentially reducing a future gain or increasing a future loss upon its sale.