Whether you are new to trading or have been doing it for awhile, I am sure you have heard the term day trading. If you are wondering what exactly day trading is, the concept is simple: trading throughout the day. It is when a trader buys a stock and sells it in the same day or sells a stock short and buys to cover in the same day. This is the strategy I tend to use when trading stocks. I do, at times, let others run their course a little, but will seldom hold a stock for more than 3 days.

When day trading, there are certain rules and terms that you must be aware of. It is easy to open up a brokerage account and start buying and selling stocks, but if you are unaware of these rules and terms you may end up having your ability to trade suspended.

The first term is free-riding. Free-riding is the practice of buying shares with funds that have not settled. In the United States, it takes 3 days for a trade to settle. A free-riding violation takes place when you sell the shares you bought with unsettled funds before the funds settle. For example, if you buy stock A on Monday and sell it the same day, the funds from this trade will not settle for three business days (Thursday). Now let’s say on Tuesday you buy stock B. If you used the funds from the sale of stock A to purchase stock B, you cannot sell stock B until Thursday or you will have performed a free-riding violation.  Once a free-riding violation has been performed your broker will freeze your account from trading for 90 days.

Don’t worry though; the easy way around this is to set up a margin account! Your broker will lend you the funds, this way you won’t have to worry about free-riding. This is also a necessity if you plan on short selling.

The second term is pattern day trader. This term is used to describe a trader who makes 4 or more day trades in 5 business days in a margin account. Meaning, if you buy and sell a stock in the same day, and do this more than 3 times within a 5 business day period, you will be deemed a pattern day trader on the 4^th day trade.

Being a pattern day trader is definitely not a bad thing, but there are requirements. If you plan on trading in this frequency, you must have $25,000 in a margin account. If you have this, great! If not, just make sure you monitor how many day trades you are making (a lot of brokers will do this for you) because if you are over the 3 day trades and are unable to fund your account to $25,000 you will be unable to day trade for 90 days.

Now that you have an understanding of what day trading is and the rules and terms associated with it, be sure to check out the getting started section for more information on trading and how to get started!

Also, if you haven’t done so already, I do recommend you subscribe for daily updates and stock picks from DayTradingDummy.com. Follow me on my journey and see if this dummy can do it!