Are you wondering why your broker won't let you buy a stock, then sell the same stock in the same trading day? Well, wonder no more. There are good reasons for that.
The action cited above is called day trading. It can occur in any financial marketplace, but day trading is most common in the stock and foreign exchange (forex) markets. Day trading is not necessarily a bad thing; neither is it illegal or unethical. But it is extremely risky and complicated, and a technique that is best employed by a professional day trader. Typically, day traders are highly experienced, well-educated and well-funded by large financial services institutions. Day traders are also bound by regulations established by the Financial Industry Regulatory Authority (FINRA).
Some Accounts Are Restricted for Day Trading
Your broker may not allow day trading based on the type of account you have. For example, if you are a first-time or relatively new investor, your account may contain restrictions that are designed to prevent you from engaging in advanced trading strategies or investing in securities that are illiquid or extremely volatile. If this is the case and you are upset by it, then it might help to view the restrictions as benevolent brakes—in place to keep you from causing yourself financial damage by overtrading without understanding the risks involved. If you are serious about investing, then it's important to educate yourself about how day trading works.
Lifting Trading Restrictions
If you are an experienced trader, however, you might want to ask your broker to remove any restrictions from your account. Depending on the particular firm and your financial standing, your broker may remove or loosen the restrictions immediately or may lift them once you have completed a given number of trades. If you continue to find your brokerage account too restrictive, then perhaps you would want to shop around, as you might be able to find a more compatible broker with fewer trading restrictions.
In Violation of Reg-T
Your broker also may restrict your account for day trading if you have a cash account or margin account and have violated any Regulation T (Reg-T) rules.
Patrick Traverse, CFP®
MoneyCoach, Charleston, SC
If you have a cash account with your brokerage firm, it takes two days for the trade to settle and the cash to be available to trade. This is known as T+2. The T stands for the day the trade took place and the two indicates the number of days it takes for the transaction to settle.
If you would like to get around this issue, you can apply for a margin on your account. A margin account allows you to take a loan against the equity in your account. This would enable you to use margin capital to purchase the next stock. In other words, your brokerage lends you, the investor, cash to purchase securities.
However, be aware that you will have to pay interest on the two days before your stock sale settles.