When opening a brokerage account for the first time, many new traders click quickly through the fine print and risk disclosures. I must confess that I did the same thing the first time I opened an account. I must warn you … this type of cursory review is not the best idea. I have seen many new traders get tripped up on certain rules and regulations that they didn’t realize existed. Unfortunately, ignorance is never a solid defense for the legal system. Specifically, I want to discuss some of aspects of day-trading rules so you are better informed.
First, I suggest everyone should actually read the risk statements and disclosures that they perhaps skimmed through in the past. Part of the agreement your broker had you sign when you first opened your account is an acknowledgment that you have read and understand what is written there.
Understanding the rules surrounding day trading is of immediate importance. Day trading is the common term for the act of rapidly buying and selling stocks throughout the day in the hopes of making small increments of money during the minutes or seconds the trade is held. Day trading is not illegal or unethical and this type of trading may seem appealing as this strategy, by definition, does not hold any stock (or risk) overnight. Most individual investors, however, do not have the capital, time, or discipline to consistently make money this way. The Financial Industry Regulatory Authority (FINRA) has established rules to protect individual investors by limiting the types of accounts that can engage in day trading. (more…)
