- Because day trading involves tight restrictions, a formal explanation of day trading is necessary to distinguish between those who are and are not affected by these rules. The Financial Industry Regulatory Authority, or "FINRA," is responsible for most of the guidelines surrounding this field. According to FINRA, a day trade is any trade that is opened and closed on the same day, during the same stock market session. If you buy shares of stock, and sell at least some of them later in the day, this is a day trade. Likewise, if you "short" stock, by selling shares you do not already own, and then buy them back later in the day, this is also a day trade. If you open a position be do not close any part of it until at least the following day, this is not a day trade.
- Everyone is allowed occasional day trades. Sometimes they are required, such as in the event of an incorrect stock order getting filled. You exit and then enter a new trade that is correct. This is a day trade. The rules that govern day trading on the stock exchanges only affect those who habitually engage in day trading. These individuals are called "Pattern Day Traders." FINRA defines a pattern day trader as anyone who executes more than three day trades within any span of five consecutive sessions, or days. You only need to pass this threshold once to be flagged as a pattern day trader by your broker.
- Traders are required by law to have a minimum of $25,000 of equity in their brokerage accounts if their broker flags them as pattern day traders. This equity can be a combination of stocks and cash. If you are flagged as a pattern day trader and you do not have or maintain this equity, your brokerage account is suspended and you cannot trade.
- A suspended pattern day trading account is re-activated for trading as soon as the $25,000 threshold is met, due to deposits of cash or stock into the account. However, a pattern day trader who is unable to deposit this cash can still trade again after a period of 90 days' suspension, at which point he may request his broker to reset the pattern day trading flag to a non-pattern day trading status.
- Day traders profit from small fluctuations in a stock's price over the course of just seconds or minutes, and sometimes a few hours. To meaningfully profit from these small changes, they must trade vast quantities of shares. A pattern day trader who meets the minimum capital requirements is required by law to receive 400 percent leverage on their stock purchases. The broker extends this leverage by loaning the trader cash, called "margin." Thus, a pattern day trader can always purchase at least $100,000 of stock on any day. However, the rule requires they close the position as a day trade. Holding onto stock purchases overnight that were purchased on day trading margin is also cause for an account suspension.
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