What exactly is a Day Trader?

If you were to ask this question, your answer would depend on who is being asked. For most people, this just means someone who purchases any one of a number of different investment vehicles and sells that same investment in the same day. What is being traded can range from options, stocks, futures or even currency. There are more but these make up the majority of day trading activity. If you were to ask this question of the Securities and Exchange Commission, they define a day trader as one who executes a day trade or buys and sells the same investment at least four times in one day. If the trader does this for five business days in a row they are then considered to be a day trader by the SEC and are subject to certain rules. The term for this is called a pattern day trader.

They must carry a minimum balance of $25,000 in their account if it is a margin account. The SEC wants to identify day traders and have different rules apply to them. The penalty is that the day trader may have their account suspended for a 90 day period if they fall below the $25,000 equity mark. If you not a day trader but are in the market and you execute four round trips in a day with less than the minimum $25,000 in your account, you will have your account suspended for the 90 day period or until you have met the minimum account balance. A round trip occurs when you purchase stocks and sell the entire amount in a trade within the same day. The restrictions are fairly stringent and are monitored closely.

Along with the restrictions that are placed on day trading, there are advantages as well. If you have been identified by the SEC as a day trader and are in good standing, that is if you maintain the $25,000 balance in your account, you can buy on margin up to a four to one ratio of the balance that you hold in your account. For example, if you have $40,000 in your account, you can purchase up to $160,000 of securities. This can be an advantage as the buying power increases your ability to move in on an investment that can earn you a profit. If you make a good trade, you stand to make four times what you would if you were only able to use the balance in your account.
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