help me to understand the day trade requirements

Question

I am new to the stock market and the Day Trade. I need your help to clarify some definitions (from Fidelity):

1. "A Day Trade is defined as an opening trade followed by a closing trade in the same security on the same day in a Margin account."

"the same security" ---- means the same stock? or it means all different stocks. For example, if I sell stock A and buy A again on the same day will be treated as a Day Trade pattern action, how about if I buy stock A and sell stock A on the same day?

If I sell stock A and buy stock B and buy stock C on the same day, do these actions will be treated as a Day Trade pattern?

2. "A Pattern Day Trader designation requires a minimum Margin equity plus cash in the amount $25,000 at all times."

"minimum Margin equity" ---- what is this? Does this number come from the broker and tell me how much I can borrow?

"a minimum Margin equity plus cash in the amount $25,000" ---- how to read this section? it is "minimum Margin equity" + "$25,000 cash" or "minimum Margin equity + cash" = $25,000 ?

Another post said: The $25,000 amount is for equity in your brokerage account (cash and investments).

The investments here includes the existing settled stocks/mutual funds I bought? For example, If I have an account with $30,000 worth of stocks/mutual funds (on a specific day.) and $20,000 cash, does this meet the $25,000 requirement?

3. I have two accounts (A1 and A2) in the same broker, can I maintain $35,000 cash in A1 and use A1 to meet the $25,000 requirement for A2?

Answer 1

First, I will point you to FINRA's page Day-Trading Margin Requirements: Know the Rules. It covers all of your questions and more.

To answer each of your questions:

1. A day trade is when you buy and sell the same stock on the same day, or if you sell short and then buy on the same day. If you open a position for Stock A and then close at least part of that position on the same day, that is a day trade.

   It needs to be for the same stock. If you buy shares of stock A and sell shares of stock B in the same day, that is not considered a day trade.

   Related question: Will this trading activity flag my account as PDT (Pattern Day Trader)?

2. The day trading minimum equity requirement comes from the Federal regulations. Once your account is flagged as a pattern day trading account, you will be required to maintain $25,000 in equity in the account. This amount can be in cash or in "eligible securities."

   In your example, if you held $20,000 in cash and $30,000 in stocks and mutual funds, you would meet this requirement.

   Related question: Pattern Day Trade - $25,000 Margin Account Rule

3. You cannot combine the equity in different brokerage accounts to meet the requirements; each account that is flagged as a pattern day trading account must meet the equity requirement in order to be allowed to trade.

   From FINRA's page:

Can I cross-guarantee my accounts to meet the minimum equity requirement?

No, you can't use a cross-guarantee to meet any of the day-trading margin requirements. Each day-trading account is required to meet the minimum equity requirement independently, using only the financial resources available in the account.

Answer 2

Ben Miller provided a lot of good information in his answer. I'd add a few additional points:

• A day trade is a round trip in an equity or option on the same day (buy then sell or short then cover).

• Making a day trade isn't a problem. You'll be considered a pattern day trader if you trade four or more times in a rolling five business day period (and your day-trading activities are greater than six percent of your total trading activity for that same five-day period).

• If you are flagged as a day trader, you must maintain $25k in cash and/or marginable securities at all times. If your account value falls below $25k, it's a violation and you will be restricted from day trading until you deposit cash or marginable securities, restoring the $25k level.

• Traditionally, Reg T intraday margin for pattern day traders has been 25% (brokers can choose to offer less margin). You could theoretically buy $100k of securities with $25k but that's not a good idea because of the leveraged risk as well as a small fluctuation could lower your account value below $25k. With the expectation of pre-election volatility, a number of brokers increased their pattern day trader margin requirements circa September.