The world of stocks is complicated for many reasons. There are a lot of different things that you’ll need to come to terms with, from concepts like risk and volatility, to issues with stock liquidity. One concept that you might hear about when you start using stocks and shares, is the concept of day trading. When you’re a day trader, you often buy and sell multiple securities within the course of a single trading period. This is often an excellent way to make money quickly by taking advantage of the tiny changes in price that occur from one moment to the next in the stock market.
Just as there are different types of investors all over the world, there are also different kinds of day trader too. For instance, the pattern day trader is someone who can potentially benefit from borrowing a lot more money for their investments. However, there are rules that you will need to agree to and follow if you want to become a PDT.
How to Become a Pattern Day Trader
To start as a PTD need to follow something called the pattern day trader rule. For those who are new to trading, this basically means that you need to have at least $25,000 in your brokerage account at all times. If you encounter any losses in your ritual that take your account to below that amount, you’ll need to find some more money to put into your portfolio before your broker will allow you to continue trading. If you don’t make the deposits required to bring your account up to the right level within five business days, then you will have to trade on a cash basis without any borrowing at all.
The amount of stress and extra pressure placed on this kind of investor can be significant, as it means that you have to commit to staying at a certain value with your brokerage account no matter what. However, if you can hold to the rules required by the financial authorities that manage the trading environment, then there are benefits to consider too. For instance, if you’re a PDT, you can work with a margin of 25% in your brokerage account, which allows you to borrow three quarters of the cost of the securities that you trade in. The average person can only borrow 50% of the amount they want to use. PDT investors get extra benefits because their brokers assume that their positions will be closed overnight, which means the firm doesn’t have to worry as much about having loans outstanding when the exchanges close.
The Complexity of Pattern Day Trading
The pattern day trader designation is determined and managed by the Financial Industry Regulation Authority, or FINRA. It’s often a very complicated strategy, which means that it might not be an ideal option for beginners who are still getting used to the ins and outs of the stock market. It may be wise to consult professional advice before laying down your hard-earned money.