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The Rules on How Many Stock Trades I Can Make Online

Original post by Jonathan Langsdorf of Demand Media

There are no limits on how many stock trades an investor can make. There are, however, rules concerning the timing and frequency of trades. An investor who trades rapidly and frequently should be aware of the rules, and also place trades through the proper type of brokerage account.

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Freeriding Rule

The freeriding or Regulation T rule may catch the novice, online trader by surprise. If your broker thinks freeriding has occurred, your brokerage account will be frozen for 90 days. Stock trades officially take three business days to settle, or become official. Payment for shares purchased is due on the third day. If an investor buys shares online and sells th4em before the three days or up, and uses the proceeds to buy other stocks without actually paying for the first stock trade, the trader is guilty of a Regulation T violation, and the broker will freeze the traders account, per Securities and Exchange Commission rules.

Margin Accounts

To avoid running afoul of Regulation T, an active trader should be trading through a margin account. The freeriding rules applies to cash accounts. With a margin account, the trader borrows the money for the trade from the broker in the form of a margin loan, so stocks can be more actively traded in a margin account. The trader must maintain enough cash in the account to cover 50 percent of the cost of shares purchased. Individual retirement accounts (IRAs) are always cash accounts, so active trading in one is difficult, and the trader should hold any stock positions for at least three business days.

Pattern Day Trader

Day trading is buying shares and selling them the same day. Day trading is an acceptable form of trading, and an active day trader can make many trades each day. Day trading requires a margin brokerage account. If a trader makes more than four day trades in any five day period, the account will be designated as a pattern day trading account. Once a trader's account is designated as a day trading account, the trader is subject to a different set of rules and restrictions compared to a regular margin account.

Day Trading Rules

A major difference in a pattern day trading account from a regular margin account is the trader equity requirements. Equity is the trader's money in the account. A regular margin account must have a minimum of $2,000 trader equity. Day trading designation raises the minimum to $25,000. A trader with a smaller account does not want to be classified as a day trader, because the account will be restricted from trading until the trader adds enough money to bring the equity to $25,000. Day traders are allowed to margin trade securities worth up to four times the trader's equity during day trading. The equity used to support this level of trading cannot be withdrawn from an account for two business days.


                   

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About the Author

Jonathan Langsdorf has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Langsdorf has a bachelor's degree in mathematics from the U.S. Air Force Academy.


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