Help Needed About PDT

I need some help.

I read the SEC requirements only after opening an account with Scottrade. The PDT restrictions are not prominently adverstised, and perhaps I should have come across them before in my readings, but didn't. I've also read the all the postings here about PDTs, but I'm still confused about a number of issues.

Any help on the following questions would be greatly appreciated:

(1) When they say "four trades," do they count a buy and a sell on the same day as two trades? What are the rules in plain English?

(2) Are these requirements actually enforced in practice as they are written?

(3) Why will online brokers not allow someone who has a cash balance below $25K to simply trade with the cash account the account holder has, without the necessity of borrowing on margin? They actually REQUIRE you to have a margin account in order to have a "pattern day trader" account. There doesn't seem to be any risk for the broker. On the contrary, the broker, in the case of Scottrade, would make $7.00 per trade, plus other fees. Could anybody clarify the confusion?

(4) Swing trading is an alternative. Is it such a horrible thing to only make "4 trades" (I need a defintion) per week, rather than holding a position for a few days? How long does it take for the trade to be settled, and the orginal funds available again for reinvestment? Does that time period preclude one from making "four trades" per week?

Perhaps a target goal of 25K is not such a bad objective. I have about 10K now to trade. Perhaps I could use these restrictions as an opportunity to learn?

(5) How would you rate Scottrade? What are the discount alternatives in this price range for someone who eventually would like to make more trades per day? I looked at just about every online broker, and settled on Scottrade because of the lower fees and the fact that it was advertised on sites like Reuters.

(6) What is the best software to use, other than that offered by the online broker, with the fastest reliable realtime info? Are the orders actually executed when placed?

(7) What is the best advice you might give to someone just beginning to trade? Any other information (websites, books, etc.) is needed and welcomed.

Thanks in advance.

Ricky

 

A buy and a sell of the same stock in the same day counts as a single day trade. If you do multiple buys followed by multiple sells of the same stock in the same day, it's usually treated as a single day trade, but you need to check with your broker to be sure. A buy, sell, buy, sell, of the same stock on the same day is usually treated as two day trades, but check with your broker.

If you do more than 3 day trades in a 5 trading day period and the number of day trades is less than 6% of your total trades over that 5-day period, your account is flagged as a PDT account. If your account is flagged as a PDT account and your equity with loan (generally, your cash + holdings - options - margin balance) is less than $25K, you won't be allowed to open new positions until you get the account up to $25K or 90 days has passed.

The rules cover stocks and options but not futures.

Mostly. Brokers differ on whether the expiration of a worthless option counts as a trade or not (and it isn't specifically addressed in the regulation) and whether they follow the 6% rule.

 

Thank you for the clarification. I've emailed the broker (again) with my concerns. You mentioned that cash plus margin can equal $25K. The SEC language does not appear to say this, but I could be wrong.

There were several other questions that I hope someone might be able to address. I original response that I received was brief and not very clear.

Thanks.

Ricky

 

Oops, I meant to say "and the number of day trades is more than 6% of your total trades over that 5-day period", not less.

 

Cash plus holdings less options less margin loan. So if you start with $30K, and buy $40K worth of stock (which consumes your $30K cash and uses a $10K margin loan), and that stock declines in value to $36K, your equity with loan is $0+$36K-$10K=$26K.

If you then buy $2K worth of options, your equity with loan goes down to $24K.