Earlier this year I wrote about some of the details & potential hazards associated with margin accounts. Many of these issues can go unnoticed, Let's take a look!
To recap my January15, 2021 post
When to Sell
One of the more difficult decisions investors may make is deciding when to sell. Each investor has their own objectives.Some simply buy and hold. Others are active and use technical analysis for shorter term moves in the financial markets. Many family and small business clients often use various strategies to achieve their goals.
The Dreaded Margin Call (forced selling)
In an interview for nerd wallet I said the following: During a rising market it’s tempting for someone who has had big gains in their stock portfolio to begin withdrawing funds. Most brokerage statements or online sites will show an amount available for immediate withdrawal. What clients fail to understand is that may be a result of margining their stock holdings. If they continue to make withdrawals in that fashion they will continually increase the margin debt against the holdings. This is akin to refinancing your home mortgage and getting cash out.
Since that writing I've seen an uptick in speculative momentum trading. Let's take a look at the Stock of EYES Second sight. We purchased that stock shortly after the markets opening at $3.51 per share. The stock appeared on our stock screener charts after receiving good news from the FDA. This was Friday March 5, 2021 we sold half of the position before the close $9.14the remaining half was sold on Monday March 8, 2021@ $10.46 per share. Overall the net gain from the transactions 178.4 %
I am using these transactions as an example of how momentum trading works. To be clear I am in no way recommending the stock to anyone at this time, this is not a solicitation. The trade was in a clients separately managed account and can be documented for any skeptics.
Second Sight Medical Products, Inc. is engaged in developing, manufacturing and marketing prosthetic devices that restore vision to blind individuals. The Company intends to develop Orion Visual Cortical Prosthesis which provides useful artificial vision to individuals who are blind due to various causes, including glaucoma, diabetic retinopathy, optic nerve injury or disease or forms of cancer and trauma. Its product, The Argus II Retinal Prosthesis System (The Argus II) provides electrical stimulation of the retina to induce visual perception in blind individuals and helps in treating outer retinal degenerations, such as retinitis pigmentosa (RP). The Argus II System provides an artificial form of vision that differs from the vision of people with normal sight. The Company's Argus II System employs electrical stimulation to bypass degenerated photoreceptor cells and to stimulate remaining viable retinal cells thereby inducing visual perception in blind individuals.
Pattern Day Trader
In the above example transaction,
another type of alert occurred in the
account. The account was flagged as
a "Pattern Day Trader".
What is a day trade?
A day trade occurs when you buy and sell (or sell and buy) the same security in a margin account on the same day. The rule applies to day trading in any security, including options.
Who is a pattern day trader?
According to FINRA rules, you are considered a pattern day trader if you execute four or or more "day trades" within five business days—provided that the number of day trades represents more than six percent of your total trades in the margin account for that same five business day period.
The rules also require your firm to designate you a pattern day trader if it knows or has a reasonable basis to believe that you will engage in pattern day trading. For example, if the firm provided day-trading training to you before opening your account, it could designate you as a pattern day trader.
First, pattern day traders must maintain minimum equity of $25,000 in their margin accounts. This required minimum equity must be in your account prior to engaging in any day-trading activities. For more information on these margin requirements, read this: Day-Trading Margin Requirements: Know the Rules.
Day trading can be extremely risky. FINRA determined that brokerage firms have a risk associated with investors' day-trading activities, so these requirements provide firms with a cushion to meet any deficiencies in the investor's account resulting from day trading. In fact, firms are free to impose a higher equity requirement than the minimum specified in the rules, and many of them do. These higher minimum requirements are often referred to as "house" requirements.
Bottom line, nothing to worry about. Just be prepared to see this flag type notice in the event that you buy and sell the same stock on the same day.