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If you’re asking the question, “should I get a margin account?” then you need to consider these 3 questions why before making the decision to get a margin account. Let’s dive in.
We’re going to be taking a look at some key questions to ask yourself before getting a margin account on this guide.
We’ll be examining 1 great reasons to getting a margin account… and 2 not-so-great reasons. Now, let’s dive in!
If this single reason sounds like a match for your reasons for getting a margin account, then you’re in a great position to get a margin account.
One of the most appealing reasons to get a margin account, is that you get unlimited day trades with settle and unsettled cash. It’s a beautiful perk of having margin account, because opportunity is always presented in the stock market–if you can find them.
Unlike cash accounts, you can only day trade with the amount of settle cash you have available–that can take one day to settle for an option trade.
If you’d like to learn more about how long it takes for stock or option trades to settle, take a look at this guide: “The meaning of T1 in option trading“
While all the reason above is great motivations to get a margin account, there are plenty of other reasons why you may not might to be thinking of getting a margin account.
If any of these next few reasons ring true to you, I highly advise to think a little bit more before diving in.
Don’t heed this advice and you’re much more likely to end up disappointed when your expectations aren’t met–or the going gets rough and you’re not deeply driven by your swing trade isn’t going the way you wanted to in the first place.
I think it’s safe to say that $25,000 is quite a bit of money to transfer to a brokerage account.
Instead…
Use a cash account. You can get unlimited day trades with the cash that is settle in your account. You can slowly work your way to $30,000 account.
Having unlimited day trades available with settle & unsettle cash can lead to over trading, or chasing trades–that form gambler habits.
If your portfolio does not meet the requirement net worth with a margin account, you’re now liable to the Pattern Day Trader rule.
In essence, if your account is worth less than $25,000 then you’re eligible to have three day trades per five business days. If you fail to comply with this rule, your account can be frozen to trade.
Let me give you an example of how quickly this can turn on you–sadly enough, this happen to me.
Let’s say you add $25,000 to your brokerage account, and you take a trade that cost you $100 out of the $25,000 in your account. The second your trade loses a dollar, your account is now valued at $25,499 and it no longer meets the margin account minimum net worth value.
You’re then automatically marked as a Pattern Day Trader, and are limited to three trade per five business days.
Instead..
Use a cash account. You can get unlimited day trades with the cash that is settle in your account. Part of being a good day trader is to be able to get out of a position when it has hit your stop loss. The last thing you want in your trade, is to sit in trade that is going the opposite direction & not being able to get out of it because you don’t want to get any violations.
So you think you have some good reasons for getting a margin account? Should you go ahead, or are you going to end up not applying for margin account?
Here’s one important questions to ask yourself before you even decide on getting a margin account.
Do you really need unlimited day trades with settle and unsettled funds? I’ve come to find out, that trading with cash that is available is a much better choice for myself.
I only need one to three good trades for the day to make a great amount of cash. If I have $1,000 account, I can split this by five trades– each trade can be valued at $200. Five trades per day, is suffice for me to grow my account.
Worst comes to worst, are you okay being downgraded to three day trades five business days? Why handicap yourself?
I personally rather sacrifice being able to trade with unsettled funds, to have unlimited day trades no matter what the net worth of my account is. I want to be able to get out of any contract when the trade goes against me–especially with weekly contracts.
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