The PDT Rule: Why You Need 25k to Day Trade
Published November 30, 2021.
The early days of the coronavirus pandemic led to a tsunami of new investors, allowing young traders to buy one of the sharpest dips since the 2008-2009 financial crisis.
Be it Robinhood or Wealthsimple, investors hopped on the trading bandwagon and got their hands on stocks, exchange-traded funds (ETFs), and commodities at rock-bottom rates.
This once-in-a-generation event also sparked a wave of day traders. But while everyone considers themselves a genius in a bull market, the pattern day trader, particularly the typical inexperienced one, could be in store for quite the ride.
So, do you want to learn day trading to take advantage of those social trading signals? We have the basics you should know about this investment journey.
Is Day Trading Illegal?
When novice traders get involved in the world of finance, many questions will pop up, including if day trading is illegal.
So, is it? Simple answer: No.
Day trading essentially refers to buying, selling, and buying the same investment in the same session, according to the Financial Industry Regulatory Authority (FINRA) and New York Stock Exchange (NYSE).
The Pattern Day Trading Rule Explained
The next step in this journey of unlimited day trading is the pattern day trader, also known as PDT.
What is it?
If you make four or more day trades of the same security in a period of five business days in a margin account, this is labeled as pattern day trading. So, a pattern day trader rule example would be executing a trade on Monday, Tuesday, and Wednesday, which then means you can only make one more on the following Monday.
In 2001, FINRA implemented PDT that also contains a day trading 25k rule and a series of other special rules. It was later approved by the U.S. Securities and Exchange Commission (SEC).
In this environment of mobile trading, zero-commission brokerage firms, and astronomical liquidity across the global financial markets, is PDT an outdated regulation?
In order to determine the efficacy of the minimum equity requirement for pattern day trader, it is important to understand why this rule was implemented.
Federal regulators introduced the PDT rule to prevent investors from being too over-leveraged and to ensure there was enough capital in their trading accounts to ensure they were shielded from the consequences of margin calls. In this market with access to cheap credit, many proponents of day trading rules over 25k say it is more needed than ever before.
What Happens if You Break the Pattern Day Trader Rule?
If you are caught skirting day trading rules under 25k on, let's say eToro or TD Ameritrade, your account will get flagged.
Depending on your investments and account type, you may be given a pass. However, if you do it again, you will likely be faced with a margin call. The brokerage firm will extend you five business days to meet the call. Should you fail to abide by the margin call, you will be slapped with a 90-day cash restriction.
Overall, your trading will be restricted in one form or another.
It should also be noted that, even if you are not day trading regularly, your broker will continue to identify you as a day trader, until it no longer has any suspicion that you trade securities regularly during a session.
In the end, it is critical to become familiar with the penny stock day trading rules or how to participate in unlimited day trading.
Which Stocks and Markets Follow the PDT Rule
Essentially, nearly every corner of the U.S. financial market abides by the pattern day trader rule. From foreign exchange to cryptocurrency to equities, it can be challenging to avoid PDT, especially since companies are diligent in their customers who day trade.
Can You Day Trade Without 25k?
So, is there any possible way of day trading with no PDT restrictions?
Yes, there are several measures you can employ to ensure that you can day trade stocks without barriers.
The common strategy that investors make is tapping foreign markets that do not possess this $25,000 day trading rule.
The other mechanism is by opening multiple brokerage accounts because you can attain three day trades for every rolling five-business-day period. So, for instance, you could start day trading in the UK or Australia.
A cash account is also simple enough because you can engage in unlimited day trading without any minimum or maximum limits. This consists of trading with only settled cash.
For example, if you have initial day trading capital worth $5,000 to invest, and you have purchased $3,000 in stock, you can only trade with $2,000.
You want to do what is best for your wallet. You may ask, "Is day trading profitable?" It can be if you know what you are doing. While rules, regulations, and restrictions could serve as hurdles to overcome, you can overcome them!