Day trading is a popular trading style that involves opening and closing a position in a single trading day. If positions are held overnight or longer, it is considered a swing trade, position trade, or investment. In this article, we will go over a common question: is day trading illegal?
Is day trading legal?
Day Trading is not illegal or unethical. However, day trading requires complex trading strategies, and we only recommend it to professionals or seasoned investors.
While day trading is legal, most retail investors don't have the time, wealth, or knowledge it takes to make money day trading and sustain it. Potential profits and losses can be significant it might not be sustainable in the long run.
Because you are not holding stocks for a longer period to ride out any volatility or collect any dividends, it carries higher risk. Read more about day trading vs investing.
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Most experts don't consider it investing. Some view day trading as a form of “bet” or “gamble”. The Securities and Exchange Commission doesn't consider day trading as investing, but rather a form of speculation. They state that day traders only hope to ride the momentum of stocks. If you want to day trade, you might want to check out our list of the best day trading apps.
Some day traders trade the forex market, so you might want to read our best forex trading apps guide.
Rules and Laws on day trading
In the USA, there is no specific law on day trading. However, FINRA enforces the “pattern day trader” rule on brokers. Under the rule, a day trader has to maintain a minimum of $25,000 in their account. If the required equity of $25,000 is not met before any day-trading activity, you are not allowed to day trade, until the minimum equity is met. Under the pattern day trader rule, you can trade up to four times over the maintenance margin excess. Your broker will issue a margin call if you exceed the buying power limitation. If you don't meet the margin call by the fifth business day, your account will be restricted to only cash basis trading for the next 90 days or until the margin call is met.
The “pattern day trader” rule and $25,000 equity balance only apply to the U.S. stock market. Other markets, such as futures, forex, or crypto markets, can also be great for day trading.
Pattern day trader rule and day trading legality in the UK
Day trading is legal in the United Kingdom and does not fall under the PDT rule. If your broker does not fall under the FINRA rules and is regulated by FCA for example, the rule does not apply.
Is day trading legal in Canada?
Day trading is legal in Canada. While some Canadian brokers follow the same rules as U.S. brokers, they are usually less strict. Alway check the terms and conditions of your broker before you deposit any money.
Conclusion
While it is not illegal to day trade, investors should be aware of their local laws and regulation. The most common rules include equity requirements, which are limited to FINRA regulated brokers and to U.S. stocks.
The reason many people think day trading is not legal is in fact due to the PDT rule and not actual laws.
