Day Trading Knowledge for 2010
Are you a day trader? According to the SEC’s definition (which is really the only opinion that matters, as far as financial transactions go), you are day trading if you buy and sell the same security within one business day, and you do so regularly (four or more times within a business week).
It doesn’t matter if you sell short and then buy the same stock later to cover your short, resulting in a net change of “0″ during business hours, or that you’ve closed out all positions by the end of business hours – you’re making short-term trades, and the SEC has developed unique rules to properly regulate short term investing.
All types of securities transactions are covered by the SEC regulations for a day trader, including buying and selling (or short-selling then buying) stocks, bonds, currency, options, futures, and anything else that is traded on the open market. Normally, the brokerage house you use (probably an online broker) will identify your account as one belong to a short term trader, and will make you keep a minimum $25,000 of equity on hand at all times to limit potentially disastrous results that could occur from trading on margin.
Note that the new minimum equity requirements overrules the previous $2000 equity minimum that was established in 1974, which not only was a “bigger” number when translated to present value dollars ($5800 at a 3% inflation rate), it was created at a time when online trading and solely day trading was not even remotely imagined. Once day trading by individuals became so popular (and their losses so devastating), the SEC had to step in to create margin requirements that fit in today’s environment.
The cushion to absorb any losses the day trader took needed to be much bigger, and most brokerage houses had already increased their own minimums to be imposed on their customers before the SEC made it mandatory, and many today have equity minimums even higher than the $25,000.
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