Stock Trading and Other Things

Is trading with a cash account still considered day trading?

A pattern daytrader is someone who buys and sells a security in the same day four times in five business days according to the rules set forth by mean people. If I do this in a cash account will I still be considered a pattern daytrader or does this only apply to those with margin accounts. Basically I do not have 25000 to maintain a balance with and want to know if I will be required to even if I am only doing this in a cash account.

Public Comments

1. Day traders are people or business that have a vast stock portfolio that requires daily buys and sells as of a balance of the accounts. A company can own so many stocks that one buy last month is sold this month. This doesn't mean that the company buys a stock and sells it the same day. It means the company simply buys and sells stocks every day. The system your describing would only be done by someone that is insane and uses a casino approach of black jack or poker.

If you had a margin account and your stock goes down instead, then you get a margin call and the broker sells off the stock to maintain the cash value of your required margin account. You lose everything because the broker will not wait for the stock to go up in the next hour or so. It will sell off faster than you can buy and sell stocks. Of course the stock could go up, with a margin account, but with the little amount of shares you'll own and the little increase of the hours, it means very little and for that day.

2. To the best of my knowledge it only applies to margin accounts.

I'm not completely sure but IIRC the rule was adopted to protect brokers. Someone rapidly day trading in a small margin account could rapidly wipe out their equity - forcing the broker to cover any additional shortfall. In a cash account there's no potential liability for the broker & they get commissions every time you trade.

3. It does not matter what kind of account you have. If you day trade more than 3 times in any 5 day period, the account is "required" to be a margin account with at least $25,000 in assets. If not, then your ability to trade will cease if you exceed that. And if you bought something you expected to sell right away after you made 3 day trades in a week, your broker will put a hold on your account.

Something else that can trip you up if you trade frequently in a cash account is the "free ride rule". If you sell and immediately buy something else the same day with proceeds from the sale (without enough settled cash for 2nd buy), you may not be able to sell the second stock until the first sale settles. So you might think you are going to make a quick trade and find out that you have to hold onto the 2nd stock for at least 3 trade days.