Definition

• The Financial Industry Regulatory Authority (FINRA) defines a day trade as any position which is both opened and closed within the same trading session. This contrasts with more conventional styles of stock market transactions where positions are often open for months or years. Even short-term traders who buy and sell repeatedly over the course of a week may not necessarily engage in day trading. A day trade may last just seconds or be held for several hours but it is ultimately closed before the session ends.
  
  

Pattern Day Trading

• Anyone might occasionally put on a day trade. If an order is entered accidentally or a sudden market event transpires, a trader may sell the stock on the same day it is purchased. This is not considered active trading. FINRA defines a "pattern day trader" as anyone who places more than three day trades during a five-day period. These may all occur on the same day or could be spread out over several days, but as soon as a trader closes her fourth day trade in a five-day period, her account is flagged by the broker as a "pattern day trading" account.
  
  

Types

• Most individuals consider a stock market trade to consist of buying followed by selling. If a trader buys stock in the morning and then sells it in the afternoon, this is a "long" day trade. However, a trader may also sell stock she does not already own, and then later purchase that stock to close the position. This kind of day trade offers profit exposure to a declining market. While the selling precedes the buying, this is still considered a day trade by FINRA rules.
  
  

Minimum Balance

• If a brokerage account is flagged as a pattern day trading account, FINRA requires that the account have a minimum of $25,000 in total asset value for the trader to continue trading. This minimum balance may be a combination of stocks and cash. If the account has less than this amount, the broker is required to suspend trading on the account until cash is deposited to reach this balance or a period of 90 days passes.
  
  

Leverage

• Pattern day trading accounts that meet the minimum balance requirement are provided double the margin power of a conventional brokerage account. Normal brokerage accounts over $2,000 in value are usually "margin" accounts that allow traders to buy twice as many shares as their cash allows, but pattern day trading accounts extend this to four times the value of their accounts. Thus a $50,000 day trading account can purchase $200,000 worth of stock. However, the position must be closed by the end of the day.