If you trade on margin you borrow some of the funds that you use to purchase an investment. If the stock drops below a certain threshold, your broker may decide that you don't have enough equity to hold the investment and may force you to sell the stock. But that hopefully won't happen.
And it is a Fed rule that when you buy a security it must be paid in full prior to its sale, if you sell with out making payment in full your account is restricted for 90 days or until payment is received and you can not use the proceeds of the sale to cover the purchase amount due.
The $25,000 item that every one talks about is that if you day trade the same stock 4 times in 5 five days you will be considered a pattern trader AND you must
1-open a margin account
2-maintain equity of $25,000 at all times, The 25,000 is NOT a balance but equity and you must have that much in your account at all times.
Some of the more commonly day-traded financial instruments are stocks,stock options, currencies and a host of futures contracts such as equity index futures, interest rate futures, and commodity futures.
Day trading used to be the preserve of financial firms and professional investors and speculators. Many day traders are bank or investment firms employees working as specialists in equity investment and fund management. However, day trading has become increasingly popular among casual traders due to advances in technology, changes in legislation, and the popularity of the Internet.
There is an alternative. BUT, I wouldn't recommend it.
You could engage in a Carry Trade. Again!! I do not recommend you do this for Day-Trading options or stocks!
You short a currency (the JPY is pretty popular). Just like shorting a stock, you get a credit. Since Forex is not regulated by the same Margin Rules as Equities, you can get 50K for a simply $500 account. With that credit, rather than buying Bonds with a higher interest rate than the rate of the shorted currency (Fed rate is 4.25, so you could get a bond around that rate, which JPY rate is .5%..you profit from the difference) you put that money into your options account. You need to be careful that you leave some room in your Forex account, as you do not want a Margin Call on this. And you need to make sure you monitor the currency market to make sure that the JPY's flat…although if it is dropping, you have the added bonus of making money there too.
I am not suggesting you do this, but just saying that there are possibilities out there. Just don't use this one, as it you need to be aware of what you are doing.
If I plan to start day trading, what's the minimum amount of equity should I have? I mean by day trading, in my case, doing 3 to 5 orders per day.
if you know any articles discussing this, it would be great!
Not all traders are day traders, and most are not, but they are not opposed to taking a profit when a position hits an early exit point.
Day traders get much press, good or bad, because many amateurs are amorous of the title and the action, but realistically they are not in the majority.
Many traders also are investors, and do buy for the long term. But long term to a trader is 9 months to a year. They'll use their equity positions to write cover calls especially playing the dividend. The equity is long term and the option is held only for a week or so.
Trading can afford one a very nice living and an above average life style.
You might not make mistakes in order entries. But many people do. Your broker is looking out for them.
How many shares (or amount of equity) of a heavily traded Fortune 500 company can you typically trade in a single transaction without getting partial fills. What about if you use Market orders vs. Limit Orders?
For instance, if you were to place an order for $100,000 of Google stock via a Market order, would you typically get the entire order filled immediately? What about if you try to sell $100,000 at Market?
What about if you do Limit orders vs. Market orders?
I would like to be able to trade very large quantities frequently during the day and would like to know if I'm going to need to account for partial fills.
Thanks so much!
(In response): Thanks, yes, I've been doing analysis for a couple of years now and know enough to be dangerous =).
The reason I mentioned the dollar amount as opposed to the number of shares is my assumption that there is a rough dollar amount to when you start reaching limits as opposed to quantities of shares.
For instance, which is more likely to get a partial fill (all other things being equal):
200 shares of a $500.00 stock
2,000 shares of a $50.00 stock
Is it better to day trader larger value stocks to reduce the chance of a partial fill or does it not matter?
Limit orders will only fill at your specified Limit price or lower (for a buy). If the stock goes up you won't get a fill.
If you don't want partial fills you can use "all or none" order. They will fill the whole order or nothing.
Another thing you should know is you don't place an order for $100,000 worth of stock. You bid for a number of shares at a specified price (limit price). Market orders you only specify number of shares.
No offense, but you should really do some reading before you start trading. It's a risky business and the more you know the better. The web is full of information, but so is a bookstore or a library.
Good luck.
Unfortunately you are right, you do need money to day trade and as a previous writer noted you need $25k for a broker to allow you to consistently day trade. I believe that is a Fed Reserve requirement not SEC. Note that I say consistent though. The broker can't prevent you from selling a position you recently bought but if they identify you as a daytrader you will have to bring your equity up to $25 before they let you do it again.
Try the top 10 trader thing below or any kind of honest papertrading. And while your at it try a long term paper portfolio for kicks. I'll bet in a year you'll wish you really invested the long term ideas – its amazing!
Also, why is this index so important as compared to others?
Any mutual fund or ETF that is based on that particular index will need to make trades in order to make sure that it doesn't drift too far from the index. That's why there is so much trading around rebalancing days.
As for why the Russell indexes are important – the DOW (30 stocks) and the S&P (500 stocks) are an indication of how the large capitalization stocks in the US are doing. The Russell indexes give one a better idea about mid caps and small caps as well. If one wants exposure to smaller companies then these indexes are better suited than the more narrower large cap indexes mentioned above.