Why do you need 25K to day trade in the US stock market?
If you are planning to day trade in the US market, you need to be aware because you will most probably need a large account to do so, in particular, we are talking about 25K USD.
But, what is this in reality? Why do you need 25K to day trade in the market? Is this a strict rule that we must follow or is this simply a rule of thumb that we typically hear from other day traders?
Well, actually, things are more complicated than it looks like because this number is not a random number. Have you ever hear about the Pattern Day Trading rule (or PDT)? If not, we will explain everything you need to know in this article.
Table of Contents
What is the Pattern Day Trading rule?
According to the FINRA, the Pattern Day Trading rule states the following:
Any margin customer that day trades (buys then sells or sells short then buys the same security on the same day) four or more times in five business days, provided the number of day trades are more than six percent of the customer’s total trading activity for that same five-day period. Under the rules, a pattern day trader must maintain minimum equity of $25,000 on any day that the customer day trades.
In other words, the PDT is a rule that is present only in the US stock and options market that will stop day traders whose accounts are under a certain quantity from over day trade.
What is the penalty for day trading with a margin account and without fulfilling the quantity stated?
The penalty they applied is to deny access to any of the US market products at least during the following 90 days.
So you should be very aware of this if you are planning to break the rule and day trade.
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Is there anything we can do to avoid the Pattern Day Trading rule?
Another possible option we could do is to trade in another market, but we understand that it may not be as feasible or comfortable, because of both the typical commissions the brokerage account offered in the US market and because of the volume, which is higher in this one.
However, we must note one thing about the PDT rule. It only applies over the margin accounts, so if you want, you can day trade in a cash account.
Nevertheless, trading in a cash account means that we will not be able to use the money invested in a trade until two more days pass from the day we close the trade. This can be quite uncomfortable to trade, yes, but it is another way.
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But why do you need 25K to day trade specifically, why that number?
The reason behind this number is that the margin account is based on a lender and borrow relationship between the day trader and the brokerage account.
The number of 25K was set because the majority of the brokerage firms believed that in order to take on the additional risk that intraday trading provided, they needed that quantity as a sort of margin.
Actually, that number can vary from brokerage firm to brokerage firm, but it is typically set to $25000.
Is the Pattern Day Trading rule applicable to all brokerage firms?
The short answer is yes. Every single brokerage firm that has listed products in the US market, whether stocks or options, abide by the Pattern Day Trading rule.
If you live in Europe you are lucky: there are brokers that do not abide by the PDT rule
Yes, indeed. If you live in Europe, there are some brokers that you can sign in with that do not abide by the Pattern Day Trading rule.
ProRealTime and Interactive Brokers are two of these brokers, and you can day trade with a minimum amount of 3000€ in any of the US products, whether stocks or options.
If you are planning to open an account and you are in Europe, we highly recommend you to start with ProRealTime if you want to trade stocks and with Interactive Brokers if you plan to trade options.
Apart from that, ProRealTime is a free platform that also provides market data on any instrument on the market. They provide every single price data at the end of the day of any instrument you may want or imagine, and they offer a free trial of 14 days in case you want to focus on day trading.
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Last words about why do you need 25K to day trade
Even when it may seem quite uncomfortable, the Pattern Day Trading rule avoids the beginners to day trade stocks or options and prevent them from losing their money.
However, this is bad news for those who have some experience but lack the resources to trade without this restriction. In any case, we have seen some solutions to avoid the PDT, some of which are not quite optimal, but at least are functional.
