How Often Can You Buy and Sell Stocks?
Navigate the regulations dictating how frequently you can trade stocks. Discover the specific rules for both margin and cash accounts.
The frequency with which an individual can buy and sell stocks is not limitless. Regulatory bodies impose specific rules to manage risk and maintain market stability. Understanding these regulations is important for anyone engaging in frequent stock trading.
Identifying a Day Trade
A “day trade” occurs when an individual buys and sells, or sells and buys, the same security within the same trading day in a margin account. This definition, established by the Financial Industry Regulatory Authority (FINRA), includes any security. For example, if shares of a company are purchased and then sold on the same day, this constitutes one day trade.
Conversely, buying shares on one day and selling them on a subsequent day does not count as a day trade. FINRA’s rules distinguish between the opening transaction and the closing transaction of a position within a single trading day to define a day trade. This regulatory framework helps to categorize specific trading activities.
Rules for Frequent Trading in Margin Accounts
Frequent trading in margin accounts is governed by the “Pattern Day Trader” (PDT) designation, a classification by FINRA. An individual is identified as a Pattern Day Trader if they execute four or more day trades within a rolling period of five business days. This designation applies provided that the number of day trades represents more than six percent of the customer’s total trading activity in their margin account during that same five-business-day period.
A fundamental requirement for a Pattern Day Trader is maintaining a minimum equity of $25,000 in their margin account on any day they engage in day trading. This equity, which can be a combination of cash and eligible securities, must be present in the account before any day-trading activities commence. This rule is outlined in FINRA Rule 4210.
Brokerage firms apply the PDT status, and if an account’s equity falls below the $25,000 minimum, the individual will be prohibited from day trading until the account is restored to the required level. This regulation aims to ensure that traders engaging in frequent, high-risk activities have sufficient capital to absorb potential losses. Some brokerage firms may also have stricter “house” requirements beyond the FINRA minimums.
Consequences of Violating Frequent Trading Rules
Failure to maintain the $25,000 minimum equity requirement for a Pattern Day Trader can lead to specific consequences. A “day trading margin call” may be issued by the brokerage firm. The individual has a period to meet this margin call by depositing additional funds or securities.
If the day trading margin call is not met, significant trading restrictions are imposed. The account may be limited to trading only on a cash available basis for a period, or until the call is satisfied. In some instances, the brokerage firm may liquidate positions in the account to cover the deficit. During this restriction, the ability to open new positions might be severely curtailed.
Trading Frequency in Cash Accounts
Trading frequency in cash accounts operates under a different set of rules compared to margin accounts due to settlement periods. For most stock trades, the settlement period is “T+2,” meaning the transaction is finalized two business days after the trade date. Funds from a stock sale are not immediately available for re-investment until this settlement period has passed.
A “good faith violation” (GFV) occurs in a cash account when a security is purchased with unsettled funds and then sold before the initial purchase has settled. For example, if an investor buys stock using funds from a sale that has not yet settled and then sells the newly purchased stock, a GFV is triggered.
Incurring multiple good faith violations can lead to restrictions on the cash account. If an individual accumulates three good faith violations within a 12-month rolling period, the account becomes restricted to trading only with settled funds for a period. This means that any new purchases can only be made with cash that has already cleared and settled in the account.