Day trading is nothing but the practice trading in shares, stocks, stock options, equity index futures, commodity futures and interest rate futures within a trading day. All the transactions are closed before the close of the day. Individuals who participate in such kind of transactions are called day traders or active traders. In the past, it was only financial institutions, speculators and professional investors who used to day trade, but today with the introduction of margin trading and electronic trading, individuals have taken to day trading big time. If you want to get into the business of day trading, you need to know the day trading rules before you start with it.
Day Trading Rules and Regulations
If you want to buy stocks, hold it for a few hours and after the price appreciates sell them within a single day, and continue this for a few days a week, you would be called a pattern day trader. As per the rules set by the Securities and Exchange Commission (SEC), you will be called a pattern day trader if you buy and sell stocks within a single day, you continue with such activity for 4 times or more within 5 business days and if your trading activity is more than 6% of the total trading activity during a week. If you are designated as a pattern day trader, there are some SEC day trading rules which you would need to follow:
- As a pattern day trader, you can trade only if you have a margin account. A margin account is nothing but depositing a minimum amount of US $25,000 which acts as a collateral against high-risk trade. Without a margin account you are not allowed to trade.
- If you want to day trade in cash account you’ll have to follow the strict rules set by the SEC called the Regulation T. If you want to trade in cash account you will have to pay a security amount within a couple of days from the date you purchase a share.
- For every day trading account you have to meet the required margin call or minimum equity. If you are a pattern day trader you can’t use cash available in another account so as to furnish cross guarantees to meet the other requirements.
When you are thinking of day trading, you need to make your trading style clear. See if you can afford to lose money as there are huge risks associated with it. No doubt there are profits involved as well, but you should be prepared to be hit as well. If you can’t take a hit, you can as well think of investing in the long term or may be in swing trading.
Day Trading Rules for Options
If you want to take advantage of the stock market you can also opt for options trading. Depending on the nature of options you choose, they have the potential of providing a greater return compared to day trading stocks. However, you need to remember that if you are thinking of using day trading options, there are high risks involved compared to just day trading where you buy and sell stocks within a single day. The rules of day trading options are similar to day trading rules and regulations.
Day Trading Tax Rules
As with all other things you buy or income you earn, you need to pay tax to the Federal government when you trade in shares. There are some ways and means by which you can reduce your tax liability if you know the rules associated with day trading. The first thing you need to understand the difference between a trader and an investor. Most people who trade a number of times a week are called investors by the IRS. However, you can opt to buy and sell stocks like a hedge fund manager and be called a stock trader and save a lot of money. You are allowed to deduct expenses related to investments like newsletter subscription, computer and home office. You can show all these expenses and save a lot of money. A few key points you should remember if you are declaring yourself as a trader are – a lot of time should be spent in trading (it’s preferred if you don’t have a full-time job), set up a continuous pattern of trading a number of times every week and your aim should be at profiteering from market swing in the short term instead of long-term dividend income.
Day trading is an option which you can use to earn some quick bucks. But always take into account whether you would be able to bear any loss that you have to face. Consider the rules before you actually plunge into stock trading, and read the fine prints so that you know the risks involved.