Margin and Day Trading
Margin buying is a tool that makes trading easier even for those who do not have the necessary amount of money. Buying on margin increases the purchasing power of a trader by allowing him to buy for an amount greater than that for which he has cash; the deficit is made up by an interest brokerage firm.
When these two instruments are combined in the form of day trading on margin, the risks are increased. And as the saying goes “the greater the risk, the greater the potential return”, the returns can be many. But beware: there is no guarantee.
The rules of the Financial Sector Regulatory Authority (FINRA) define a daily transaction as “buying and selling or selling and buying the same security on the same day in a margin account”. Short selling and buying to hedge the same shares on the same day as well as options are also within the scope of a day trade.
When it comes to day trading, some do it only occasionally and would have margin requirements other than what can be termed a “day trader pattern”. We understand these terms as well as the rules and margin requirements of FINRA.
The term pattern daily trader is used for someone who executes four or more daily trades within five business days, provided that one of the following two things:
The number of daily trades is greater than 6 % of his total transactions in the account on the sidelines during the same five-day period.
A person makes two daily unfulfilled business calls within 90 days. The account of a day trader without a template only occasionally engages in day trading.
However, if any of the above criteria are met, a non-compliant day trader account will be referred to as a model day trader account. But if a model day trader’s account has not traded daily for 60 consecutive days, its status is reset to a non-model day trader account.
