Day trading involves buying and selling stocks in the same company repeatedly during trading hours to make quick profits. This is a high-risk business that can lead to substantial gains or losses within a short time.

Day trading with a margin or borrowing money can magnify potential gains or losses.

Margin traders borrow from brokers to increase the volume of shares they trade, which can have a positive or negative impact on the trade.

Key Takeaways

• Margin trading is a way for investors to borrow money to buy more shares than they can afford with their cash.
• Margin traders must have some funds or securities equivalent to a certain percentage of the potential loss on deposit.
• The trader will have to deposit more cash or close the position if the loss is greater than the amount deposited.

Margin and Day Trading

The brokerage firm provides the shortfall, charging interest on the amount loaned. The brokerage firm offers the shortfall, charging interest on the amount lent.

The Financial Industry Regulatory Authority defines a day trade as “the buying and selling, or the selling and buying of the same security in a margin-based account on the same date.” 

Pattern Day Trading

A pattern day trader executes at least four-day trades in five business days. The trades must represent more than 6 per cent of the total trades made on the margin account.

Margin Requirements

Minimum margin: FINRA requires a minimum margin to be deposited before a trade can begin. The trader is required to deposit at least $2,000, or 100 per cent of the price of the margin security, whichever amount is lower, with the brokerage.

Initial margin: Investors are required to deposit sufficient cash or securities in order to meet the brokerage firm’s initial margin requirements. Regulation T of the Fed limits borrowing at 50% or less.

Maintenance requirement: FINRA regulations require brokerage firms to impose “maintenance requirements” on margin accounts, which defines the minimum amount that traders must maintain in margin accounts. Maintenance margin requirements for pattern day traders are a minimum of $25,000 3.

Warning

When a margin call occurs, the account’s balance falls below the required maintenance margin. Margin calls require traders to either add money to their accounts or close positions.

Margin Buying power

The buying power for a day trader pattern is four times greater than the margin of maintenance at the close of business the day before.

An account that has $35,000 in it after a day of trading is $10,000 above the minimum requirement. This is equal to a purchasing power of $40,000. The brokerage firm will issue a margin call if the limit is exceeded.

The trader is given five working days to comply with the margin requirement. During this time, the trader is limited to buying only two times as much maintenance margin excess.

Example Trading on Margin

Let’s say that the trader has $20,000 more than his maintenance margin. The trader’s trading power is $80,000 (4x$20,000). The trader has exceeded his buying power if he buys $80,000 from PQR Corp. and $60,000 from XYZ Corp. on the same day at 9:45 am.

They will still receive a margin call for day trading the following day, even if they sell both the following day during the afternoon. The trader would have been able to avoid the margin call if he had sold off PQR Corp prior to buying XYZ Corp.

What happens when a trader does not meet the maintenance margin amount?

A brokerage firm can use a margin request to close any open positions and bring the account value back to the minimum. The brokerage firm may liquidate positions without approval. The trader may be charged for the transaction. 4

Can brokerage firms set their own rules on margin trading?

Brokers are required to follow the guidelines set by regulatory authorities. However, they may have stricter requirements for their own house. Broker-dealers can define a day trader in a more broad sense. Brokerage firms can impose higher margins or restrict purchasing power.

What is the interest rate on a margin account?

Trading on margin is the same as taking out a loan and paying interest. Interest rates can vary between brokerage firms. They range from 3% up to 12%. This, of course, increases or reduces the loss on the trade.

The Bottom Line

Day trading can be risky. But day trading with margin is even more dangerous. A margin account allows a brokerage firm to lend money for the purchase of a large quantity of securities. It multiplies either the profit or loss from the trade.

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