Stock Trading Accounts
WHAT IS A BROKERAGE ACCOUNT?
A stock trading account also known as a brokerage account must be opened with a day trading brokerage prior to making any stock day trades.
Today, this process is done mostly over the internet using the broker's account forms on their websites. If you prefer, account forms can be printed, filled out and mailed back to the broker.
If your account is accepted, money can be sent in usually by check, or wired in from your bank account.
An account can usually be set up fairly quickly, and you can be ready to trade in a matter of days if your money is wired in, longer if you send a check.
Read further to find out more about how much you'll need to fund your trading account. This kind of account is different from your basic investor account and has different requirements placed on it, due to it's day trader status.
HOW MUCH MUST BE DEPOSITED IN THE ACCOUNT?
WHAT IS A PATTERN DAY TRADER?
If your plan is to be a stock day trader, your stock trading account will fall under U.S. Securities and Exchange Commission (SEC) "Pattern Day Trader" rules, which was started on February 21, 2001. A person buying and selling (or shorting selling and buying to cover) a particular security (stock) in the same trading day AND doing this four or more times in any consecutive 5 business day period is labeled a pattern day trader by the SEC.
Trades that are held overnight are not considered day trades. However, trades made during pre-market or after-market hours are day trades.
A pattern day trader is subject to a rule that normal investors are not. You must maintain an equity balance of $25,000 in a margin account. Accounts that fall below the $25,000 minimum equity requirement will not be allowed to day trade.
TYPES OF BROKERAGE ACCOUNTS
There are two basic types of stock trading accounts -- CASH and MARGIN.
Cash (regular) accounts allow long only trades. These accounts do not allow trading on margin, in other words 'buying power' is restricted to your cash balance.
A cash account is not for stock day traders, since cash accounts do not allow short selling. And, as I just mentioned above, the SEC's pattern day trader rule states day traders must maintain a margin account.
A margin account allows a sort of 'credit card' like buying power for the day. The brokerage firm will give you funds that are available for day trading in excess of the value of your cash balance. A margin account also allows you to short sell any stocks that it has available.