Day Trading on a Cash Account

Discussion in 'Ask any question!' started by Bodacious, Jul 12, 2019.

  1. Bodacious

    Bodacious Active Member

    Joined:
    Jul 6, 2019
    Messages:
    274
    Likes Received:
    207
    I'm new to the market, kinda green on the rules, I did a little research on day trading with a cash account, but I'm not sure I completely understand.

    This my take away.

    With a cash account it is alright to day trade as long as you have the funds in the account to cover every purchase. In other words, if I start fresh and I have $1k in the account I can do nine $100 day trades in one day as long as it isn't the same stock over and over again, then the next few days would be no trading until the account settles (2 to 5 business days)?

    I am confused? I'm probably never going to be a regular day trader, but there may be an instance where a day trade might be handy, I need to know the rules.
     
  2. Bodacious

    Bodacious Active Member

    Joined:
    Jul 6, 2019
    Messages:
    274
    Likes Received:
    207
    If your account is a cash account it is not a subject of PDT which means you could make unlimited day trades with settled funds.

    5 business days are for the deposit settlement. It only takes 2 business days for a closed position to be settled, but the proceeds can be used immediately for a new purchase.

    However, the unsettled funds cannot be used for a round trip trade (buy/sell certain stocks and sell/buy it). Otherwise you will trigger a GFV, good faith violation. With 4 GFVs, the account will be restricted.
     
  3. Bodacious

    Bodacious Active Member

    Joined:
    Jul 6, 2019
    Messages:
    274
    Likes Received:
    207
    I need the layman's explanation.
     
  4. Bodacious

    Bodacious Active Member

    Joined:
    Jul 6, 2019
    Messages:
    274
    Likes Received:
    207
    Day trading in cash accounts
    The Pattern Day Trading rule regulates the use of margin and is defined only for margin accounts. Cash accounts, by definition, do not borrow on margin, so day trading is subject to separate rules regarding Cash Accounts. Cash account holders may still engage in certain day trades, as long as the activity does not result in free riding, which is the sale of securities bought with unsettled funds. An instance of free-riding will cause a cash account to be restricted for 90 days to purchasing securities with cash up front. Under Regulation T, brokers must “freeze” an investor’s account for 90 days if he/she sells securities that have not been fully paid (i.e.,paid for with unavailable funds). During this 90-day period, the investor must fully pay for any purchase on the date of the trade.
     
  5. Jrich

    Jrich Well-Known Member

    Joined:
    Jan 8, 2017
    Messages:
    702
    Likes Received:
    576
    Pattern day trading rule also requires a minimum $25k balance in the account.... it was sold as an ingenious government initiative to protect traders from themselves, but in reality its just to ensure your broker that you have enough skin in the game that you wont walk after a string of bad trades
     
    Bodacious likes this.
  6. Mitzter

    Mitzter Member

    Joined:
    Apr 4, 2016
    Messages:
    69
    Likes Received:
    53
    You can daytrade the entire $1000 in your example, but it has to settle 3 days before you can use these funds again for a next trade.

    There are offshore brokers as a work around this restriction or the minimum $25k accounts.
     
    Bodacious likes this.
  7. Bodacious

    Bodacious Active Member

    Joined:
    Jul 6, 2019
    Messages:
    274
    Likes Received:
    207
    Are all accounts with less than 25k in them considered to be margin accounts? I got it, the picture is becoming clearer.

    The Financial Industry Regulatory Authority (FINRA) in the U.S. established the "pattern day trader" rule, which states that if a stock-trading customer makes four or more day trades (opening and closing a stock position within the same day) in a five-day period, the customer is considered a day trader and must maintain a minimum account balance of $25,000.

    https://www.thebalance.com/how-to-day-trade-stocks-with-less-than-25-000-1031365

    So, if accounts under 25k are margin accounts, does this mean the broker will allow buys beyond the cash value actually in the account? What about shorts, will the broker loan shares?

    This is where my comprehension comes unglued.

    If a customer deposits 1k into an account, the customer then waits until the deposit clears his/or her bank, then the customer buys and sells 100 dollars worth of the same stock (day trades) for four consecutive days it is considered PDT activity and it is a no-no? This is the part I don't get, it's not money from margin buying or selling, it is the customers cash, and in being so it would seem that the customer can buy and sell as need be, it's not like the customer is borrowing from the broker and putting the broker at risk, because in effect under the described scenario the broker incurs no risk at all?

    I just can't wrap my mind around how the customer cash becomes margin cash? I could understand if the customer bought and sold up to the 1k deposit threshold because it takes time to settle, but if it comes out of customer cash in the account then someone, everyone, got paid, even if it does take two days to settle.
     
  8. Mitzter

    Mitzter Member

    Joined:
    Apr 4, 2016
    Messages:
    69
    Likes Received:
    53
    For accounts under $25k you have to decide if you want to open a regular margin account or a cash account. A regular margin account often needs a minimum balance of $2k.

    You can upgrade a cash account to a margin account later on, but downgrade from margin account to cash account is often not possible.

    With a margin account you can do 3 daytrades in a 5 day period, the funds settle immediately. While with the cash account you can do unlimited daytrades, but the funds need to settle 3 days.

    For example if you have a cash account with $15k you can do 15 daytrades of $1k, on the same day, or spread over multiple days. Only the $1k daytrades need 3 days to settle till they can be used again.

    Shorting is only possible in margin accounts.
     
    Bodacious likes this.
  9. Bodacious

    Bodacious Active Member

    Joined:
    Jul 6, 2019
    Messages:
    274
    Likes Received:
    207
    Robinhood is not really a broker? Robinhood is a go between, a middleman?
     
  10. Bodacious

    Bodacious Active Member

    Joined:
    Jul 6, 2019
    Messages:
    274
    Likes Received:
    207
  11. Mitzter

    Mitzter Member

    Joined:
    Apr 4, 2016
    Messages:
    69
    Likes Received:
    53
    Robin hood gets paid by its bad order fills, I would never go with them if I were you. They advertise by being free, but because of the bad order fills they will be more expensive than other brokers.

    But not sure about your question if it is a broker or middlemen :p
     
    Bodacious likes this.
  12. Bodacious

    Bodacious Active Member

    Joined:
    Jul 6, 2019
    Messages:
    274
    Likes Received:
    207
  13. Bodacious

    Bodacious Active Member

    Joined:
    Jul 6, 2019
    Messages:
    274
    Likes Received:
    207
    I think I have it.....

    It takes one day to settle a buy even if the cash is available in the account, and selling an unsettled stock is considered day trading, thus waiting one day makes the buy settled and allows for a sell without repercussions.
     

Share This Page