Trading Account

Trading Account — Overview

A trading account is a brokerage account that holds securities, cash, or other assets and is used for active buying and selling. Traders who buy and sell the same security within a single trading day typically use these accounts. Trading accounts can be cash or margin accounts; day traders commonly use margin accounts to increase buying power.

Key takeaways

• Trading accounts hold securities and cash for active trading and are distinct from long-term investment accounts.
• Day trading is defined as buying and selling (or shorting and closing) a security within the same trading day.
• Pattern day traders must maintain a minimum equity of $25,000 under FINRA rules.
• Margin trading increases buying power but also increases risk (interest, margin calls, possible liquidation).
• Most reputable brokerages offer SIPC protection against firm failure (not against investment losses).

Who is a pattern day trader?

FINRA defines a day trade as a round-trip buy and sell (or sell short and cover) within the same day in a margin account. A trader is considered a pattern day trader if, within five business days, they:

• Make at least four day trades, and
• Those day trades constitute more than 6% of the trader’s total trading activity during that period.

Brokerage firms may also classify clients as pattern day traders based on account activity or other reasonable criteria.

Margin rules and requirements

Regulation T (Federal Reserve Board) sets base margin requirements for margin accounts. FINRA Rule 4210 imposes additional maintenance requirements for pattern day traders:

• Minimum equity: $25,000 in the trading account.
• Purchasing power: Traders may use up to four times any equity in excess of the $25,000 minimum for intraday purchases.
• Equity in non-trading accounts cannot be used to meet the pattern day trader calculation.
• Failure to meet margin requirements results in a margin call; if not satisfied within the brokerage’s prescribed period (commonly five business days), trading limits and forced liquidations can follow.

How to open a trading account

1. Choose a brokerage and complete the account application.
2. Provide identification and personal information (e.g., Social Security number, contact details).
3. Fund the account.
4. To trade on margin, sign the broker’s margin agreement and meet initial margin/house requirements as well as regulatory rules.

Brokerages may have additional account-opening requirements depending on jurisdiction and their business policies.

Risks and disadvantages

• Leverage magnifies both gains and losses; traders can lose more than their initial investment.
• Margin accounts incur interest charges on borrowed funds.
• Margin calls require prompt funding or liquidation of positions.
• Day trading is high-activity and high-risk; rapid losses are common without risk controls and experience.

Safety and protections

Most established brokerages participate in the Securities Investor Protection Corporation (SIPC), which provides limited protection against a brokerage firm’s failure (typically up to specified limits). SIPC does not protect against market or investment losses.

Conclusion

A trading account enables active buying and selling of securities, often using margin to increase buying power. If you plan to day trade, understand the pattern day trader designation, the $25,000 minimum equity requirement, and the heightened risks of trading on margin. Carefully evaluate broker policies, protections, and the risks involved, and consider professional advice before trading with leverage.