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You spot several positive signals in the stock market this year and plan to make investments in a couple of outperforming stocks. Your investment goals are not becoming a shareholder and receiving intrinsic benefits of a stock such as dividends, voting rights, or initial capital at the maturity date. But you rather target lucrative gains from perpetual purchases and sales of the instrument, even within the same business day. In case this is your long-term strategy, it is important to determine how many times you should deal in the same stock.
Buying and Selling the Same Stock on the Same Day: Possible or Not?
Whereas financial experts often recommend stock investors, especially beginners, to employ the buy-and-hold strategy, many still revel in short-term tactics to make money. Thanks to the thriving online trading platforms, stock brokerages now permit their clients to buy a stock and then sell it within the same business day without waiting another two days to settle the transaction. The mentioned act is widely known as “day trading”, an incredibly popular trading style in foreign exchange (forex) and stock markets.
Having said that, a few brokers may place several restrictions on your account if you are first-time in the stock market or countries by which these brokers are administered place a ban on intraday trading tactics. This activity stops you from participating in unsuitable trading strategies for your current competency or trading highly volatile securities. Those brokerages may loosen trading restrictions if you demonstrate that your financial standing and experience suffice to deal with incurred risks from intraday stock transactions.
How Many Times Can You Buy and Sell the Same Stock?
Provided you wish to conduct trades for the same stock within many consecutive business days, you should notice whether the selected brokerage imposes any limit on that activity. Normally, the frequency of placing purchase and sales orders of the security depends much on where your broker settles down, particularly inside or outside the United States.
Inside the United States
Trading stocks in the United States is not illegal but the US government has so far enacted stringent policies and regulations to bind this activity among investors and traders. This motive is supposed to prevent individual participants, especially the inexperienced, from uncontrollably entering and exiting stock deals without anticipating further losses they may encounter.
Registered brokers in this jurisdiction are under the supervision of competent organizations such as the US Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). According to the FINRA rules, broker-dealers have to designate their clients as pattern day traders if they buy and sell the same stock four or more times during the five-day window. What’s more, the number of intraday transactions must equate to more than 6% of the total trading activities in the investor’s margin account.
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Accordingly, pattern day traders are required to keep $25,000 as the minimal margin in their account balances. If they fail to reach this requirement, they are prohibited to proceed with their intraday deals. Moreover, US brokers may introduce a different maintenance margin excess for pattern day traders. Those customers cannot exceed the buying power limitation regulated by their brokers. Otherwise, they will receive a margin call from brokerages and be given five business days to fulfill that call. Over that period, their intraday trading power is confined to merely two times.
Nevertheless, not all investors can afford – or at least want – to set that margin amount aside from financial resources available for trading. Therefore, if you open a US account with a licensed broker-dealer but dislike being identified as a pattern day trader, you are discouraged to deal in the same stock in four or more day trades over the span of five trading days.
Outside the United States
The “pattern day trader” concept does not apply to other stockbrokers outside the United States. Some countries may enforce different laws to control stock trading activities on highly leveraged accounts, whilst others have not carried out any decisive actions on those practices. This means you may place multiple day trades of the same security as you want. Thus, no matter whether you work with a local or foreign broker-dealer, it is better to learn about possible restrictions on your stock transactions.
Consequences of Repeatedly Buying and Selling the Same Stock
FINRA’s day trading margin rules are passed to foil aggressive trades among stockpickers. A certain level of margin, particularly $25,000, implicitly requires clients to prove their actual financial ability before their involvement in stock day trading. Also, that amount is considered sufficient to offset potential risks associated with stock trading activities.
That various countries take little or no actions to manage existing and prospective day traders in the stock market can be regarded as positive news to those who favor starting small. Unfortunately, not all traders have enough experience and capabilities to precisely analyze the short-term movements of the chosen security. Furthermore, there is no guarantee that the stock’s decent performance will last permanently. Apart from microeconomic factors from the issuing company, the stock value is profoundly affected by external elements such as the central bank’s monetary policies, natural disasters and so forth.
The given factors contribute to higher stakes confronted by day traders. That is why this strategy is considered to best match highly seasoned, well-funded and well-educated traders for faster returns within a shorter time. Meanwhile, this technique is too complicated and risky for rookie traders. Unofficial statistics from legitimate brokers and academics indicate that the vast majority of stock day traders underperform and are followed by negative returns.
Possible Costs of Repeatedly Buying and Selling the Same Stock
Commissions are the first consideration you should notice if you are serious about day trading strategies. Basically, the broker will receive a certain amount of commission or spread per transaction you implement. Those fees can be fixed or float depending on the volatility of the traded instrument. It does not matter if you make a fortune. But an insignificant gain is not adequate to cover those payables. The resultant net profit unsurprisingly drops below zero.
Taxes on capital gains might be a major concern among day traders. According to the 2021 research of Betterment and Market Cube, almost 60% of respondents said that those taxes keep them from short-term trading activities and encourage them to hold stocks longer instead.
The Two-Hour-Per-Day Trading Strategy
Regardless of which type of account you are holding, you should ponder some important elements including trading hours, volume, volatility and risk management.
The fundamental rule behind the two-hour-a-day trading plan is that you had better engage in the stock market at the beginning and end of the business day.
Unlike foreign currencies, stocks are not bought and sold 24 hours a day. At FinmaxFX, the stock market frequently opens from around 7 AM GMT+0 to 3:20 PM GMT+0 and 1:31 PM GMT+0 to 8 PM GMT+0. Most trading volume is recorded in the first and last hours of the trading session.
In the previous evening, stockpickers regularly spend hours researching market news related to traded securities, technically analyzing the possible market directions in the following day and eventually making a sensible decision. Shortly after the stock market starts its new day, flocks of programmed orders rush to be placed with the full participation of high-volume players, mutual funds, exchange-traded funds, retail investors and even day traders. This escalates market liquidity and makes stock deals quickly executed.
By the end of the day, day traders who commit not to hold positions overnight will sell the same stock they bought on the same day. Besides, multiple financial institutions do not long for keeping their positions over a weekend or a long holiday (e.g. Christmas), because the off-hour market is relatively illiquid. Meanwhile, retail investors opt for purchasing a stock at the end of the day and then selling it the next day. This ploy enables them to hold the security for less than 24 hours without being labeled as “pattern day traders”. Therefore, little wonder that the market at the end of the day is lively as well and gives you a good chance to enter.
Research on Trading Volume and Volatility
When learning about a particular stock, you need to factor in its trading volume and amount of volatility in the early and late hours of the trading day by looking at historical data. You then should purchase or vend that instrument at a higher or lower price than its underlying value if any volatility elements during those times are recognized.
Establishing limit orders is the best way to manage the involved risks in the stock market. This type of order permits you to buy or sell a security at a determined price or better instead of at the current price of filling the transaction. For example, if you want to buy Company A’s stock and refuse to pay more than $30 per share, you may contact your broker to place a limit price of $30. The same also applies to selling the stock.
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