What Are Day Trading Rules for a Cash Account?

by Liam Walter ; Updated July 27, 2017
Day trading with a cash account is similar to day trading in a margin accont with a few restrictions.

Day trading in a cash account is similar to day trading in a margin account. Margin is the ability to use leverage to buy securities. Trading under a cash account significantly lowers your trading risks. Under a cash account, traders are not able to use leverage, pattern day trade, short sell and traders are subject to the three-day clearing rule. In addition day traders with a cash account are not able to file taxes under a trader status.

Function

The rules imposed on a cash account are intended to protect individual investors. With nearly 95% of traders losing money in the stock market, the Securities and Exchange Commission set these in place to prevent large initial losses in the stock market.

Types

Traders are subject to the three day clearing rule, this means after a trader with a cash account sells a security they must wait three business days to access the funds to trade again. However, traders under the three day clearing rule are still able to use any settled funds to buy securities. Furthermore, traders with a cash account are not allowed to short sell securities. Short selling is the act of selling borrowed shares and then buying the shares back. Traders are also unable to pattern day trade, which is the act of buying and selling a security within a trading day four or more times in five consecutive business days. Lastly, traders with cash accounts are not able to use borrowed money to buy securities.

Features

If a trader with a cash account pattern day trades, then their account is frozen for up to 90 days. Traders are not able to withdraw unsettled funds due to the three-day clearing rule. Not being able to short sell or use leverage greatly lowers financial trading risk, because traders are not able to lose more than what is in their stock account.

Considerations

Trading under a cash account severely limits the amount of trading you are able to do, due to the pattern day trader rule. In addition, because traders with a cash account are not able to pattern day trade, they are not able to file taxes under a trader status. Filing taxes under a trader status allows traders to deduct all of their capital loss against their income.

Warning

Day trading is not right for everyone. Even trading with a cash account involves significant financial risk. Nearly 95% of traders lose money in the stock market. Trading with a cash accounts puts you at a large disadvantage, because you are limited to three-day trades per week under a cash account.

About the Author

Liam Walter is a self-employed stock operator. In addition to being a financial speculator, he is a lead writer for new-electronics.com, and has been freelance writing since early 2001. Walter studied kinesiology at Austin Community College. Before becoming a full-time trader, Walter worked as a certified nurse's assistant in various nursing facilities.

Photo Credits

  • stock chart with a pencil mark image by Dmitriy Lesnyak from Fotolia.com