Frequent Intraday Trading: Understanding the Basics
Written by FINRA Staff for The Motley Fool -> If you're an avid trader, you might be pursuing--or thinking about pursuing-- a strategy involving frequent, intraday trading. Investors who actively trade securities, including stocks or options, throughout the day might attempt to
If you're an avid trader, you might be pursuing--or thinking about pursuing-- a strategy involving frequent, intraday trading. Investors who actively trade securities, including stocks or options, throughout the day might attempt to profit from small price movements, typically related to volatile stocks, and often make these trades using margin. However, some active investors might choose to implement a frequent trading strategy in cash accounts as well.
The possibility of making rapid returns through this type of trading can be tempting, and online brokerage accounts and apps have made frequent trading more accessible and engaging. However, frequent intraday trading comes with risks--particularly if you're trading on margin--including losing some or all of your investment.
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When you buy securities in a cash account , you must pay for securities in full before selling them. Buying and selling the same security in a cash account before paying for it is known as " free-riding ," a violation of the Federal Reserve's Regulation T that can lead to strict account restrictions. You can also incur what's known as a "good faith violation" if you purchase a security with cash from a transaction that hasn't settled yet and then sell the security before the proceeds used to fund the purchase have settled.
If you trade frequently in a cash account, be sure that you understand securities settlement cycles and requirements, and that you closely monitor the cash you have available for purchases, to avoid inadvertently committing cash trading violations.
The current settlement time for most equity trades is T+1, or the next business day. Therefore, if you want to engage in intraday trading in a cash account, be sure that you fully pay for those securities at the time of purchase with settled funds.
Many investors who are interested in frequent trading choose to use margin accounts . However, margin trading comes with its own set of risks, including the potential to lose more than your original investment.
To trade using margin (funds borrowed from your firm), you must maintain a minimum of $2,000 in equity in your margin account. Your brokerage firm may require higher minimum equity amounts--often called "house" requirements--depending on the firm's policies and your account activity.
