The PDT rule states that if you trade more than 3 day trades in a 5 business day period of time you are considered a day trader. If this happens you must maintain at least $25k in your account at all times. In the U.S. you can use Suretrader to get around PDT or open a cash account(see below)
What is a Day Trade
A day trade is when you buy and sell a stock on the same day. They match up buys and sells, so if you buy a stock once and sell those shares split up into 3 sales, that is 1 day trade. Same as if you bought 3 times and sold all shares at once. Still 1 day trade.
What is the $2.50 rule?
When shorting a stock under $2.50 you have to have at least $2.50 in equity per share even if stock price is less. Example: You want to short a .50 stock and you have $10,000. To figure out how many shares you could short you divide $10,000 by 2.50 which is 4000 shares.
Cash account versus Margin account?
A cash account is an account where you only use your cash, no margin. This allows you to get around the PDT rule but it takes 3 days for any money gained from selling to settle in your account. So if you have $3000 and you use $1500 for a day trade, you have $1500 left to use until the previous trade settles.
What's the best broker?
This is different for each person and location. Different countries have different brokers. Also, the strategy you are using. If you use shorting in your strategy then I.B.(Interactive Brokers) or Suretrader are good choices. But, you also need a certain amount of $ in order to open an account with I.B. These are all the things you need to consider when picking a broker:
- Opening requirements
- Fees - Especially on shorting or buying pennystocks
- Software - Included or extra charge
- Level II access - Free or extra charge
- OTC shorting / buying allowed?
- Shorting allowed at all price levels?
How much money should I start with?
If you are playing penny stocks or low priced stocks then I would start with a minimum of $2000. It is possible to start with less but commissions make it very difficult to make enough to be positive.
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