https://finance.zacks.com/tax-rules-use-proceeds-stock-sales...
https://www.fidelity.com/learning-center/trading-investing/t...
My understanding is that you couldn't do day trading without a margin account.
But the chance of an eventual margin call is almost certain in the long run (as has happened here).
It’s time to talk ethics in tech, this was a design decision to not unwind this once the user was embedded or otherwise clarify this upfront.
Margin call risk totally must be disclosed and is legally required (in Australia where I am) to be disclosed by any investment professional you paid to setup this sort of arrangement. I’d be fairly confident the same applies to US investment advisers.
It’s totally the sort of ‘feature’ that the user could have been advised of around say the 30 day mark. “We’ve set you up a margin account that’s valid for your first $1000, please now confirm if you’d like to continue to carry a margin call risk otherwise were converting you to a standard account.”
It’s also super common for margin facilities to allow investors carrying the risk, 24-48 hours to contribute to retain the position, auto-selling out is a last resort.
And we're actually half a decade behind most of Asia and Europe.
The difference between the credit risk and the margin loan is that in the vast majority (say > 99%) of times the credit risk does not become a loan. You don't need to punish all the people acting in good faith for the action of a few. The regulation on free riding comes from a money supply perspective. You are not allowed to create money without taking out a loan.
All that is exchanged during the day are IOUs (debt) and if one player in the chain goes bankrupt during the day the central bank might cover its debt up to some limit.
We haven't had any major crisis since those instant pay apps were put into place. So those aren't really battle tested systems and I guess we'll only effectively discover how resilient they are during the next crisis...
If the investment dropped far enough.. say to $12,000, the margin call facility works like this.
It considers the remaining money is always the lenders, so now the lender is exposed for $10,000/$12,000 eg 83% of the exposure is theirs.
They then ask you to top back up your contribution so they are less exposed (within 24-48hrs), or they auto-sell stock to ensure they are not exposed further.
In the case of Robinhood, the margin lending arrangement is always fully backed once the cash is processed. Which I’m guessing is always reliably a few days after it’s deposited.
So it’s crazy to trigger margin calls as all the debt is quickly fully backed.
It would be expected that Robinhood would have negotiated an instrument that never left them with margin calls on cash contributions like this. This is totally on them.
Fortunately they make it easy to create new accounts and transfer from one to another. Now my banned account is empty and I'm more careful.
My husband once accidentally messed up his transfer to Vanguard and it didn't go thru and he already purchased mutual funds with that money he meant to transfer. It told him he had a trading violation and the lady on the phone said having just a single trading violation didn't matter.
The US moved to what's called T+2 settlement (trade + 2 days) in 2017, over 2 years ago. Zacks still talks about T+3. In contrast, your Fidelity link gets it right.
Someone might say "so what!", but Zacks purports to be a financial advice website. They should know better. It makes me question the accuracy of the rest of their website.
https://en.wikipedia.org/wiki/T%2B2 https://www.sec.gov/news/press-release/2017-68-0
Directly from the link:
"In 2017, the SEC amended the T+3 settlement cycle to a T+2 settlement cycle, effectively shortening the three-day rule to a two-day rule."
I clearly see the following. Directly from the link of the poster I responded to:
https://finance.zacks.com/tax-rules-use-proceeds-stock-sales... Tax Rules on How to Use Proceeds of Stock Sales to Buy New Stocks
...
For example, imagine that on Monday you have nothing in your brokerage account except shares of a specific stock, which you sell that morning for $10,000. The trade will settle on Thursday.
They just described T+3 not T+2!
(Looks like a more direct link would be https://finance.zacks.com/wait-three-days-sell-stock-11114.h...)
Consider a scenario where you have a cash account with say 100 dollars and you buy 1 share of stock X for 100 dollars. That's it, you can no longer trade for two days. Because trades take two days to complete, if you have a cash account you need to wait that full two days before you technically own the shares and can sell it. Until that two day elapses, your account has 0 dollars in it.
This is known as free riding:
https://en.wikipedia.org/wiki/Free_riding_(stock_market)
Now if you have 100 dollars in your account and you buy stock A for 30 dollars, then your account will have 70 dollars left that you can use to trade with, but this is an incredibly inefficient and impractical way of trading.
If you can't sell the stock that you bought on the same day that you bought it, then by definition you can not day trade.
Deposit $1000, wait 3 days, buy and sell $100 of the same stock in the same day. You still have $900 to trade with.
It may be “less efficient”, but it also reduces your risk, and risk management is fundamentally what successful trading is about.
Some people don’t want to depend on the bank for margin or leverage, and are happy to trade with cash only. Increased efficiency brings increased risk and decreased ability to deal with short term shocks.
My understanding is that if you had $100 and you purchased stock for $100 and it went up in few hours to $120 and you decided to sell it, so you can purchase something else. You can't you have to wait 2 days.
Of course if you have enough money you will have buffer to account for that, but it makes it harder to do day trading when everything is delayed by 2 days.
The "you can't part" here is what's not clear. My understanding of non-margin trading is that you would be able to sell for $120. What you would not be able to do is then purchase something else with that $120 until T+2 when it settles and the money is in your account again. You technically don't have that $120 until the settlement.
Whether or not you can "day trade" on a cash account would probably just be equivocating about what "day trading" is. It definitely does limit your ability to very quickly enter/exit positions.
In a cash account when you sell, the funds must settle for 2-3days... meaning you can't use those funds for purchases.
It keeps people who are cash short out of the market, rather than in... that's the main difference for small accounts.