If you are just starting out trading in the stock market, then this is the perfect place for you to be. What I am going to explain in this post is the single most restrictive rule to capitalism that I have ever experienced in my time investing.
Otherwise known as being classified as a Pattern Day Trader.
A pattern day trader is someone who places 4 day trades in a five rolling business day period.
This could mean that you placed a day trade on Monday, Tuesday, Thursday, and Friday and you will be classified as a Pattern Day Trader because it is within a 5 business day period.
A day trade is defined as a buying and selling a security in the same business day. If you want to be more complicated, it could also mean shorting and buying in the same day as well, but we are going to stick with the simple definition for now.
If you are classified as a pattern day trader, your account is then restricted for 90 days or until you meet the minimum equity requirement of $25,000. You will not be able to trade anymore, and in many cases you won’t be able to buy any other securities as well. You will only have the ability to sell what you have already purchased.
A day trade does not mean that you day traded that day, it counts the exact number of trades that you have made within the day too. So if you bought and sold a AAPL stock in the same day, it would be one day trade. However, if you decided to buy and sell that same AAPL stock again that same day, it would now be considered as TWO days trades.
So why do I think this rule is so stupid?
This PDT rule was put in place to discourage people with smaller accounts from making risky investment decisions without have due diligence methods in place.
So basically… to stop stupid people from losing money.
My gripe with this rule is that it also restricts people who have familiarized themselves with the stock market, and who feel that they can trade in an educated manner.
It also limits the fundamental basis of capitalism in the United States, which is that people should be able to do whatever they want to do with their money. I feel that it is almost offending that the FINRA is telling me that I can’t do certain things with the money that I have already earned.
Let’s use my situation as an example.
As of January 2020:
I have been under the PDT for the entirety of the past year, and I still am as I “only” have $20,000 in my trading account. I feel as if I have proved myself to be profitable in many ways, however, if I want to trade every day for multiple times a day, I will need to fund my account more, at least $5k more.
The only other ways around it would be to convert my account into a cash account, or open other brokerage account; and both of those options come with their own disadvantages.
I find this to be intrusive to my ability to enjoy my money. Yes, I could pursue other markets to invest in, but I don’t see why I should be limited in the first place. If I had the ability to sell 10 houses in a single day then I should, no one would put a rule in place saying that I couldn’t because I didn’t have enough money.
- PDT is a rule that prevents smaller accounts (<$25,000) from day trading consistently
- If you are classified as a PDT then your account will be restricted for 90 days, limiting your ability to buy and sell securities
- In order to get around it, you must either fund your account to $25k or use a cash account or multiple brokerage accounts
I hope that I have provided value to you as a trader in order to help make your next trade profitable!
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