Let’s face it like everything in life: to make moves it requires money. Day Trade Buying Power (DTBP) simply means the amount of money you have at hand in your account to place trades on a given trading day. There are two types of accounts: you can have margin and cash accounts to execute your buying power.
What would happen if you walked up to the register at the supermarket and didn’t have money to purchase your groceries? Then you wouldn’t be able to buy any of the items. The same concept applies to buying power if you don’t have enough money in your account then you can’t execute a trade.
Types of Accounts
Cash Account
Cash accounts limit you to the amount of money you have in your account. With cash accounts you don’t have to worry about margin calls. The amount you can make is restricted to the quantity you are able to invest. Cash accounts let you day trade but require up to a three-day settlement period after you execute a trade. The three-day settlement period keeps you from being able to use this position to execute another trade. It also limits the amount of money available to trade.
If you have less than $25,000 in your account then you are limited to three trades on a rolling five business day period; this is referred to as the Pattern Day Trader Rule. Let’s say you only have a $1,500 account; you can only make three-day trades (from open to close of the market) within a rolling five-day period. Once you have $25,000 in equity in your account, these limits would no longer apply to you. This is very important to remember and when using the thinkorswim platform this can be located on the top left of your screen; like displayed on the image below.
See where it says DT left, in this example, there is a 0 which means you can not execute a trade. If you do try and execute a trade you will be labeled as a pattern day trader which you will then not be able to execute a trade until your account reflects $25,000 in it. With TD Ameritrade you are only allowed to undo this mistake once in the lifetime of the account. So don’t let what you might think is a small oversight limit you from continuing to trade.
Once again when using the platform think or swim you can find your buying power in the top left corner like the image below. You may notice that the amount has stars like this *; in order to remove this and see how much you have you click on the privacy button. Clicking the privacy button will allow you to see how much money is in your account. Then it will display like the image below.
Margin Account
Before trading on margin, it is important to know FINRA (Financial Industry Regulatory Authority) requires you to pay a set amount with whichever brokerage firm you elect to go with. A minimum $2,000 or 100 percent of the purchase of the price of the stock; whichever is smaller. When trading stocks an interest fee is charged on the money that was loaned to you by the brokerage firm. Each brokerage is different and has their own set fees that range between 3% and 12%.
Margin accounts allow traders to borrow money against the value of the money in your account. With a margin account a day trader can borrow money from a broker and not have to worry about needing to come up with the whole value of the trade. You don’t have to wait for your cash to become available with a margin account; there is no wait for a settlement period after you execute a trade.
The advantage of using a margin account is that the day trader will earn a higher profit than if they would have purchased the stocks with their own cash. However, the disadvantage is the brokerage firm charges interest on the loan until the debt is resolved. This increases day traders’ cost of buying stock. If the stocks’ worth decreases in value the investor will be negative and will also have to pay interest to the brokerage firm on top of recuperating from debt.
A brokerage firm may ask an investor to increase the amount of money they have in a margin account. The brokerage firm may also sell the investor stocks if the broker feels they are at risk or even take legal action against the investor if they are in the negative. The investor has the potential to lose more money than what he/she originally invested.
If you don’t want to pay margin interest then the trade must be completely paid for before it settles. Margin interest is accumulated daily and charged monthly. The interest accrued each day is determined by multiplying the settled margin balance by the annual rate interest rate and dividing the result by 360. The amount of the outstanding balance determines the annual interest rate on that specific day.
Make It Rain
Now you know the two types of accounts you can choose from to execute your day trading buying power; cash account and margin account. Both options have their set rules and it is important to follow them no matter which option you go with. At the end of the day, you are looking to become a day trader to make a profit; not to be in the negative. Or even worse place yourself in a position you are unable to trade for simply not following the rules.
Knowledge is power as you can see if you didn’t know this information about buying power you could have really made a mess of things. So, get educated by a professional and use a strategy that has been tried and tested. You can now make an informed decision on what works best for your situation to execute trades with a cash or margin account.
Summary of Day Trading Buying Power: Cash vs Margin?
There are positives and negatives to both a cash account and a margin account when it comes to day trading buying power. If you choose one account type and decide you’d rather have the other you can always change it. We recommend using a cash account if you have less than $25,000 to avoid violating PDT (Pattern Day Trader) rules. As a new trader you want to gain experience and confidence through live trading and with our system of buying and selling contracts on the same day you will limit yourself to only a few days to live trade every week.
Feel free to check out our 1-hr webinar and other FREE educational resources to help guide you as you begin your new journey to financial freedom.
Also download a ( FREE E-BOOK ) by Maurice Kenny DAY TRADE LIKE A MILLIONAIRE.
