It imposes specific requirements on frequent traders to ensure they are adequately capitalized and aware of the risks associated with rapid buying and selling of securities.
Minimum Account Equity: You must maintain a minimum equity of $25,000 in your margin account. This amount must be in the account before engaging in any day-trading activities. The $25,000 can be a combination of cash and eligible securities.
Margin Account Requirement: The PDT rule applies only to margin accounts, not to cash accounts. This is because day trading often involves using leverage, which is only available in margin accounts. Therefore, if you wish to engage in day trading and meet the PDT criteria, you must have a margin account with your brokerage.
Margin Call: If your account falls below the $25,000 minimum equity requirement, you will receive a margin call. To continue day trading, you must deposit additional funds or securities to bring the account back to the required level. Until this is done, day trading may be restricted.
Buying Power Restrictions: For a Pattern Day Trader, the maximum allowable day trading buying power is typically four times the excess maintenance margin in the account. If this limit is exceeded, the broker will issue a day-trading margin call, which must be met within five business days. Failure to meet this call can result in account restrictions.