Do I need $25,000 to Day Trade?
This one will be a quick short discussion over a how much money is ideal for day trading, and whether or not you actually need $25,000 to trade daily.
A question that comes alot to us is, "Can i day trade without $25,000". The answer to that is yes, as long as you have a cash account.
SETTLEMENT TIME (T+?)
Before getting into the difference between a cash and margin account we will discuss something called settlement time. Or the time it takes for your money to settle after a trade. In today's environment most brokerages have a T+1 or T+2 settlement. T stands for transaction date and + (?) stands for the time it takes to settle after a transaction date. If your brokerage has a T+1 or overnight settlement that means if you take a trade worth $500, and sell for a profit at $550 the same day or next day, the funds won't be able to be traded again until the day after you sold. Say you took the trade on 2/1 and sold on 2/1 , you wouldn't be able to trade those funds till 2/2. Now say you took the trade on 2/1 and sold on 2/2 , now you wouldn't be able to trade those funds until 2/3. As it takes 1 day to settle after the sell. If its T+2 that means if you take a trade today you won't have those funds available to trade for another two days. This is usually prevalent in a cash account as funds take time to settle. Meanwhile on a margin account the settlement period is instantaneous and you have your cash available right away.
A cash account is the best account type for those trading with under $25,000 and are looking to day trade. A cash account only allows you to trade your own money , the funds that have been settled and nothing more . So in a way it offers the new trader safety in terms of only allowing the individual to trade their money without taking on the additional risk of another entities money.
So let's say you open an account with $2,000 , you are allowed to trade up to $2,000 worth of trades that day. Whether you take 20 *$100 trades or you take 5 *$400 trades, you take take any combo variation of trades as long as you don't trade more than $2,000.
Say you started at $2,000 and here's what your trade log could look like for the day (assuming there are no trading fees and T+1):
Trade Entry = Dark Blue - Entry cost
Trade Exit = Red Green - Exit cost incorporated with Profit/Loss (Say your entry was $100 and you sold at $150 , the $150 would be green with your profit being $50 (Entry - Exit = Profit/Loss)
Buy Power Left - This value is derived from your (starting daily balance - trade entry(s)).
Total Cash - Total Cash available in your account at the end of every trade. In this case if you ended the day at $2510 , your starting buy power the next day would be $2510 and the same process begins again , this time as long as you trade under $2510 worth of stock you will be all good. assuming it's one day settlement.
For the most part, this is how most default accounts are structured. A margin account allows you to use extra money or the brokerages margin as trading buy power (as long as you meet the minimum deposit rules , etc). On this type of account you need $25,000 to day trade or else you are restricted to the PTD (pattern day trader) rule , and can only place 3 day trades in a five day cycle. If you trading account is over 25,000 you can utilize a margin account to day trade, as since you would have instant settlement times. This would allow you to trade as frequently as you want.
"But i don't want to. use margin" . That's great , most people don't know that even if you have a margin account you are not required to use the margin the brokerage gives you, using margin is optional. Even you have margin on your account , the brokerage will always utilize your cash on hand before utilizing the margin.
Say you have $30,000 cash in your account, and you wanted to take a $31,000 position. The brokerage will first use your $30k cash and only utilize the additional $1k under margin. So as long as you stay under the account value you won't have to use any margin. (Most brokerages allow you to have a margin account and turn off margin abilities so just check and make ure. Also brokerages do charge interest on margin so make sure you know what the rates are before you start using it !)
That's pretty much it for the basics of a margin vs cash account. If you have any questions, don't hesitate to drop them below !