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Does the PDT rule apply to cash accounts?

  • 3 min read
  • Last updated 29 Nov 2022

If you’re into trading, you’ve probably heard of the USA-exclusive pdt rule. But if you’ve ever wondered ‘does the pdt rule apply to cash accounts?’ we can help with that. 👇

First of all, what is PDT… and the PDT rule?

Many people know PDT as an abbreviation for Pacific Daylight Time – but we’re talking trading here. And in the trading world, PDT stands for pattern day trader. This is basically a fancy way to describe ‘more advanced’ traders (versus amateur ones).

To be considered a pattern day trader, you have to execute four or more day trades over a five day period. 

🚨 Now this is where it gets serious. 🚨

Not everyone is allowed to be a pattern day trader. And in the USA, if you’re caught pattern day trading without meeting certain requirements, you’ll be in violation of the PDT rule set by the Financial Industry Regulatory Authority (FINRA). 

Told ya, it’s pretty serious business. 😅

The requirements to become a PDT are:

  • You have a minimum of $25,000 in your brokerage account 💵

That’s literally it.

Essentially, the PDT rule prevents beginners from diving in head first without armbands. After all, day trading is high-risk. 🤷

If you have more than $25,000 in your brokerage account, you’re also considered a more sophisticated trader. If this describes you, then congrats – you’re ready for the deep end!

So what’s a cash account?

A cash account is a type of brokerage account  – and a brokerage account is somewhere you buy and sell a variety of investments. Think stocks, bonds and mutual funds.

When opening a brokerage account, you have the option to choose between a cash account or a margin account.

The difference between the two? You guessed it – cash. 💸

With cash accounts, you can only make trades with the money available in your account. It’s just like a regular shopping transaction:

Your grocery shopping comes to £50, so you pay £50 with your debit card. But say your account has £0 in it, your card declines and you don’t get your groceries, right?

With a margin account, you can borrow money to buy securities (stocks, ETfs, etc). So even if you don’t have £50 to pay right now, you can still get your goods (as long as you’ll be able to pay later).

So, does the PDT rule apply to cash accounts?

Nope! The PDT rule doesn’t apply to cash accounts, only margin accounts. Cash accounts aren’t generally used for day trading. Pattern day traders find them to be too limiting compared to margin accounts.

The PDT rule may not apply to cash accounts but not so fast! 🖐️

There are still other ways you can receive a penalty:

1. The good faith violation

You buy a security, let’s say a stock. You sell this newly purchased stock before paying for it with fully available funds in your account. You’ve violated the good faith rule. Whoops.😅

2. The freeriding violation

You buy a stock, but then you sell a different stock to pay for your new one. So you’re trading with cash that wasn’t already available in your account. Yikes! 🥲

Confused? Just trade with fully available funds in your cash account. 😬

What happens if you break the PDT rule?

Brokers can lock your account as soon as they suspect you’ve violated the PDT rule. 🚩

Many brokers will give you what is called a ‘margin call’. This is a chance to redeem yourself. A margin call means you’ll have to deposit at least $25,000 into your account (the minimum you need to be allowed to day trade).

You have five days to do this before consequences follow:

  • A 90-day account suspension 🥲
  • Limits on account activity
  • Permanent account restrictions

Key takeaway: don’t break the PDT rule‼️

Now you know all about the PDT rule, we bet the UK doesn’t sound so bad after all. 😅

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