When it comes to the stock market, there is an unlimited number of ways to make money. Some investors like to handpick individual stocks, while others invest primarily in index funds and exchange-traded funds (ETFs). Those looking for excitement and action tend to day trade or swing trade by buying and selling stocks frequently.
There is nothing stopping people from buying and selling stocks as many times as they want. But, all investors and traders should be aware of the restrictions imposed by the Financial Industry Regulation Authority (FINRA). Violating specific rules around rapid trading can lead to penalties and tax consequences.
- If you want to day trade, or buy and sell stocks multiple times a day, you need to follow the pattern day trading rules established by FINRA.
- The two types of accounts you can have are cash accounts and margin accounts. In order to day trade, you need a margin account.
- Before day trading, you should spend some time understanding its tax implications and risks.
Buying the Same Stock Twice a Day
You can buy the same stock as many times as you want on the same day. But, once you start buying and selling multiple times in one day, you get into day trading territory, which comes with some caveats. Your account needs to be approved for day trading by your brokerage firm for you to day trade regularly. Otherwise, your broker can restrict your account if you get flagged as a “pattern daytrader.”
Cash vs. Margin Accounts
Before we go into the details of day trading, let’s go over the difference between the two main types of accounts you can have.
Investors and traders with cash accounts can only buy stocks with money readily available within their accounts. That means, as long as there is money settled in your account, you can buy and sell the same stocks multiple times on the same day.
For example, if you buy ten shares of Apple at $160 per share on Monday, you would need $1,600 in cash available in your account by the settlement date to pay for the stock. Generally, most brokerage firms follow T+2, meaning the settlement date occurs on the day the security gets traded plus two business days. So, when you sell a stock, the money isn’t instantly deposited into your account. The whole process takes three business days. In this case, the settlement date is Wednesday. If you sell the Apple shares for a profit, you cannot rebuy the stock until T+2 is up, although you can buy other stocks. Additionally, if you have a cash account, you cannot day trade more than three times in five days.
When I opened an investment account with TD Ameritrade for the first time, I was not aware of the difference between a cash account versus a margin account. I assumed that I would have instant buying power once I deposited money into the account, similar to my Robinhood account. Because I tried to buy shares of stock with unsettled funds, I ended up getting penalized for the transaction.
Investors and traders with a margin account can borrow capital from their brokerage firm or exchange to buy securities. You may have already experienced this if you use investing platforms like Webull or Coinbase Pro, which automatically enable margin accounts for their users. If you have access to instant deposits for any of your investment accounts, you are using margin.
There are several benefits to using a margin account rather than a cash account. You get access to faster liquidity and have the ability to leverage your assets at a low interest rate. However, most brokers require your account to stay above a minimum maintenance margin of 25%. In the case of stocks, you must have at least 25% equity in any stocks purchased on margin or risk getting margin called, which can force you to liquidate your stocks.
Day Trading Basics
Now that we’ve covered the two different types of accounts you can have, let’s go over some day trading basics. Day traders take advantage of short-term price action in securities, such as stocks and cryptocurrencies, by going in and out of trades many times within the same day. For example, a day trader may purchase 500 shares of a stock at $2 a share and sell it five minutes later for $2.20 a share making a profit of 20 cents per share, or $100.
Most active traders focus on short timeframes and close all open positions at the end of a trading day. They typically use technical analysis to create trading plans, such as support and resistance, candlestick patterns, and MACD.
Pattern Day Trading Rules
Anyone who makes more than four trades within five trading days is a “pattern day trader,” according to FINRA. To day trade that frequently, you need to have at least $25,000, either in cash or equity, in a margin account at all times. Additionally, you will likely need to be approved for day trading by your broker or risk your account getting frozen.
If you meet the requirements, you can buy and sell the same stock as many times as you want within the same trading day with no restrictions. However, if you do not meet the requirements or your account drops below the minimum balance requirement, you can only make three day trades within five days without any consequences. One way to sidestep this rule is to buy stocks at the end of the day and sell at the beginning of the next day. With this strategy, you can still buy and sell stocks in less than 24 hours without violating any rules.
Aside from these restrictions, your broker may impose its own rules on your account. For example, if your account is relatively new or if you have limited trading experience and you disclose that to them, the firm can apply additional trading limits on your account to minimize risk. For example, on my Fidelity Roth IRA account, I can only use settled funds to buy stocks because I have not been approved for a margin account.
If you buy 20 shares of Matterport and then sell your shares in increments of 5 throughout the day, that is considered one day trade. If you buy 10 shares, then sell 6, then buy 10 more shares, and then sell all your shares, that is considered two day trades.
Every time you change the direction you buy or sell your shares, that is one day trade. The first example gets considered as one day trade because you buy once and then keep selling. The second example gets considered as two day trades because you alternate between buying and selling twice.
Before day trading, you should consider its tax consequences. Depending on how long you hold the stocks, you will be taxed differently for short-term versus long-term capital gains.
You incur short-term capital gains whenever you buy and sell a stock within a year, which gets taxed as ordinary income. Depending on your income, you could get taxed as much as 37% on your gains.
If you hold your investments for more than a year, you get taxed at the long-term capital gains rate, which is much more favorable.
Day Trading Risks
Only a fraction of traders is consistently profitable in the long run as day trading comes with many risks. The majority of day traders suffer severe losses when they first start, and many never become profitable. Before taking a stab at day trading, you must learn to manage your risk appropriately and do your homework.
With day trading, you are competing against dedicated professionals and algorithms. Generally, these professionals have years or decades of experience. In addition, some brokers charge fees every time you make a trade. So, the more often you go in and out of positions, the more fees you incur. Over time, this can eat into your profits!
That’s why I prefer the buy and hold strategy over day trading. While this strategy is less exciting, it requires less time and effort and allows me to dive deeper into understanding how different companies operate.
The Bottom Line
There are very few limits to what you can do in the stock market. You can buy the same stock twice in a day or more. But, if you want to buy and sell the same stock multiple times in a day, you need to meet the requirements set by FINRA and your broker.
However, depending on your risk profile and personal preferences, you may be better off investing long-term rather than rapidly trading. Day trading is not as easy as it seems, and there is a lot of research required to become profitable.