The trading world comes with a lot of interesting lessons to learn, about how businesses build and lose value, and even about the way that market conditions effect shares. Aside from learning how to master your buying and selling strategies, you’ll also need to dedicate some time to understanding the vernacular that comes with purchasing stocks. As you head into the trading landscape, will you define yourself as a standard investor, a day trader, or even a pattern day trader?
That’s an important distinction to make, and one you can’t overlook if you’re serious about building your wealth. Today, we’re going to define the pattern day trader rule, and what this kind of investor actually does in the stock market.
A Simple Definition
The term pattern day trader isn’t just a fancy name for someone in the stock market who follows a specific strategy to buy and sell each day. This is the regulatory designation that’s given to any investor that executes more than four trades in a series of five days. More importantly, those purchases, and sales need to be made something called a margin account.
A margin account is a form of brokerage account that provides you with the opportunity to purchase securities and shares using borrowed funds. You’ll need to make a deposit using cash or assets to cover the risk on your transaction – and you’ll need to keep a minimum of at least $25,000 in your account at all times – to ensure that you don’t trade too aggressively. The “PDT” term was created by FINRA, and it provides many highly focused day traders with an opportunity to make more money in their day-to-day investments.
After all, when you can borrow money, you have more scope to collect more cash if you know how to work the market that you’re in. However, this isn’t a strategy that’s recommended for beginners, because of the level of risk that comes with the designation.
Does it Make Sense to Become a PDT?
Clearly, not everyone will be well-suited to the PDT description. This kind of buying and selling puts a lot of pressure on investors to follow specific rules with their cash. At the same time, there’s always a risk that you could end up losing more money than you have. However, for highly professional traders who focus on the market all day as their source of income and livelihood – this can be a powerful option.
As with any trading strategy, before you dive deeper into the world of things like PDT accounts, it’s important to think carefully about your goals, and your risk levels. If you can’t tolerate potentially losing huge amounts of money – then you may want to start pursuing your wealth-building portfolio in another aspect of the stock market first. You could even try experimenting with PDT strategies using a paper trading facility, so you can see how well you would operate with larger amounts of borrowed money if you decided to get involved with this kind of trading.