Day Trading Requirements in US and Abroad for Stock Traders
How much money do I need to become a stock day trader? Typically, to day trade stocks in the US you will need to maintain an account balance of $25, 000. You should start with at least $30,000 (but likely more) if you plan to make more than that 4 day trades per trading week (more than 4 day trades per week will give you day trader status and you will be subject to the $25,000 minimum account balance). If you’re account drops below $25,000 you won’t be able to continue day trading until you replenish your account to more than $25,000.
Accounts can opend for less than this, but you'll need to stay below the 4 day trader per week limit. You can "swing trade" though, which means holding positions overnight--still short-term trading, but not day trading.
You can day trade other global markets without this account minimum. You should open a typical account with at least $10,000 if you are short-term trading outside the US (each exchange may have different requirements). With smaller accounts than this, fees can become a very large obstacle to overcome.
Also, stocks are traded in 100 share lots, therefore, a small amount of capital limits the stocks which can be traded–for instance with a $10,000 account stocks over $100 will not be tradable, unless you’re using leverage since you can’t even purchase 100 shares. That said, if trader sticks to low priced stocks, this is not an issue.
While these minimums are in place to enter the market (regulation in US, guidelines in most other markets), it is important to remember that one of the common errors traders make before even starting to trade is being under capitalized. Keep in mind that losses do occur, so you need to account for this fact. After taking losses you still need to have enough money to keep trading.
I recommend only ever risking–at most–1% of your capital on a trade. Your risk is defined as the difference in price between your entry price and and your stop level, multiplied by the number of shares of have. For example, if you enter at a stock at $10, place a stop-loss at $9.75 and take 500 shares. Your risk is $0.25×500=$125. To make trades like this you need $12,500, as $125 is 1% of the account. In the US you need $25,000 but in other markets you may be able to get away with less, as the example above shows.
For more on stock trading requirements in the US you can read this little pamphlet from the SEC: http://www.sec.gov/investor/alerts/daytrading.pdf, but here are the main points:
- Minimum Equity Requirement: The minimum equity requirement for a customer who is a pattern day trader is $25,000 [four day trades per week]. This $25,000 requirement must be deposited into the customer’s account prior to any day trading activities and must be maintained at all times. A customer cannot fulfill this $25,000 requirement by cross-guaranteeing separate accounts. Each day trading account is required to meet the $25,000 requirement independently, using only the financial resources available in that account.
- If a customer’s account falls below the $25,000 requirement, the customer will not be permitted to day trade until the customer deposits cash or securities into the account to restore the account to the $25,000 minimum equity level.
- Day Trading Buying Power: A customer who is designated as a pattern day trader may trade up to four times the customer’s maintenance margin excess as of the close of business of the previous day for equity securities. If a customer exceeds this day trading buying power limitation, the customer’s broker-dealer will issue a day trading margin call. The customer has five business days to meet his or her margin call, during which the customer’s day trading buying power is restricted to two times the customer’s maintenance margin excess based on the customer’s daily total trading commitment for equity securities. If the customer does not meet the margin call by the fifth business day, the day trading account will be restricted to trading only on a cash available basis for 90 days or until the call is met.
How Much Capital Do I Need to Start Day Trading Stocks? --- Final Thoughts
Day trading stocks can be capital intensive, but traders should make sure they have enough capital before commencing day trading. Being under-capitalized is a big mistake as a few losing trades can cripple a trader making it hard to make the capital back and thus creating a downward spiral.
Work out a strategy and make sure you can handle a string of losses. Only when enough capital is available to sustain a long string of losses and a strategy is outlined (in detail) should a real money account be opened. More trading information can be found on the Trading Tutorials page at VantagePointTrading.com
Also trading takes time to learn. If you are going to day trade trade full-time (no other source of income) you should budget for at least 6 months to year to learn how to trade consistently. This is an additional cost to funding your account. Therefore, you will need more money than just what you put in your account. Don't expect your day trading to start paying off immediately or consistently. Money and consistency take time, so have AT LEAST 9-12 months or more of savings to pay your bills.
There are also other markets to consider trading which are less capital intensive. The article Forex Day Trading with $1000 (or less) looks at trading the Forex market--currencies--with much less capital than stocks require.
Cory Mitchell, CMT