When you continuously buy and sell investments in a margin account within a very short time, perhaps a few minutes or hours, and rarely hold them overnight, you're considered a day trader. The strategy is to take advantage of rapid price changes to make money quickly. The risk is that as a day trader, you can lose substantial amounts of money because no one can predict how or when prices will change.
Requirements for Accounts that Actively Day Trade
FINRA has implemented account requirements for accounts that actively day trade. The amendment updates FINRA Rule 4210. This rule sets the guidelines for investment accounts that use the trading strategy commonly known as day trading.
The amendment establishes new requirements for customers who actively day trade (known as pattern day traders).
The rules only affect customers who are classified as pattern day traders. The FINRA definition, under rule 4210, defines a pattern day trader as "any customer who executes four or more day trades within five business days, provided the number of day trades is more than 6% of the total trades in the account during that period". Scottrade defines a pattern day trader as any customer who executes four or more day trades within five business days.
In addition to this new definition of a pattern day trader, the following amendments went into effect on Friday, Sept. 28, 2001:
Higher equity requirement. The minimum equity requirement for pattern day traders is $25,000.
Clarification on the term "day trade". Redefines the term "day trade" to treat the sale of an existing position held from the previous day as a liquidation, and the subsequent repurchase of that position as the establishment of a new position not subject to the day trading margin requirements.
Day trading buying power. Day trading buying power is calculated based on the customer's account position as of the close of business on the previous day. The amendments limit day trading buying power to four times the day trader's maintenance margin excess.
Trading in a cash account is limited to available settlement date balances in accordance with Regulation T and FINRA Rule 4210. If you do not have a margin account, you cannot be classified as a pattern day trader.
Scottrade is committed to assisting our clients who are affected by the FINRA rule.
Margin trading involves interest charges and risks, including the potential to lose more than deposited or the need to deposit additional collateral in a falling market. Scottrade's margin agreement, available at scottrade.com or through a Scottrade branch office, contains the Margin Disclosure Statement and information on our lending policies, interest charges and the risks associated with margin accounts.