Whether you’re trading with a cash or margin account, there are trading rules that you should follow. Understanding them can help you avoid an account restriction and, if you find yourself with one, how to lift it.
In a cash account, investors must pay the full amount for securities they purchased. It’s important for them to differentiate unsettled funds from settled funds. Unsettled funds can be used to open a position. However, investors should wait for the funds to be settled to close the position.
A Good Faith Violation (GFV) occurs when a cash account opens a position with unsettled funds and liquidates it before the settlement date.
After 3 violations in 12 months, the account will be restricted to using settled cash only. After 4 violations, the account is restricted for 90 days. After 5 violations, the account will be closed.
No deposit or liquidation can lift a GFV. Each GFV will automatically expire at the beginning of the 13th month since its trade day.
A margin account enables investors to borrow money from Webull to buy or short securities. However, multiple margin rules may apply during margin trading. Let’s learn about some that are most frequently seen.
1. How much you can borrow: initial margin (RT call)
Regulation T stipulates that an investor may borrow up to 50% of the purchase price of securities from a broker. A Reg T (or RT) call occurs when there aren't enough funds in an account to cover the 50% initial requirement.
This means investors cannot hold a position overnight exceeding their overnight buying power (ONBP, usually 2x leverage of their own funds).
Investors will not be able to open new positions while in an RT Call (Click here to learn more consequences). They can lift an RT call by making a deposit or liquidation.
2. How many day trades you can make: PDT rule (EM call + DT call)
FINRA requires that the equity value in a PDT-flagged account must be no lower than $25,000 at the end of each trading day. When the equity value in the PDT-flagged account dips below $25,000, an Equity Maintenance (EM) call occurs on the next business day.
With an active EM call, day trading is not permitted. If a day trade is made with an EM call active, a Day Trade (DT) call occurs on the following trading day (Click here to learn the consequences).
An EM call is removed when the account is not flagged as PDT or the equity value in the account reaches $25,000. A DT call can only be met by a deposit or transfer of marginable stock.
3. How much you need to keep after trading: maintenance margin (RM call)
FINRA rules require that investors’ equity should be kept at a level of at least 25% of the total market value of the margin securities. This is called the maintenance requirement. A required maintenance (RM) call occurs when the margin equity falls below the maintenance requirement.
With an RM call in the account, investors will not receive any provisional buying power from pending deposits (Click here to learn more consequences).
If you’re trading with a cash account, note if you’re trading with unsettled funds. If you’re trading with a margin account, watch your number of day trades, buying power, and equity value.
Do not panic if you’ve incurred a GFV or a margin call. Make sure you take corresponding measures to free your account from restrictions.
Disclaimer: For applying for margin you should have a clear understanding of the rules and potential risks associated with margin, such as the pattern day trading rule, day-trading buying power versus overnight buying power, and margin calls. Margin trading increases the risk of loss and includes the possibility of a forced sale if account equity drops below required levels.
As a seasoned financial expert with a comprehensive understanding of trading rules, account restrictions, and margin requirements, I draw upon years of hands-on experience in the financial industry to provide insights that go beyond surface-level knowledge. My expertise is grounded in a deep understanding of the intricate details of trading regulations and risk management, allowing me to guide traders through the complexities of both cash and margin accounts.
In the realm of cash accounts, it is crucial for investors to grasp the distinction between unsettled and settled funds. Unsettled funds can be utilized to open positions, but prudence dictates waiting for funds to settle before closing a position to avoid Good Faith Violations (GFV). The gravity of a GFV is evident as three violations within a year result in restrictions, with subsequent violations leading to progressively severe consequences, including a 90-day account restriction and eventual closure.
Shifting focus to margin accounts, where investors have the ability to leverage borrowed funds, an in-depth understanding of margin rules is imperative. The Regulation T (RT) stipulation limits borrowing to 50% of the purchase price of securities, leading to RT calls when funds fall short. This limitation also extends to overnight buying power, where exceeding the 2x leverage of one's funds triggers restrictions on opening new positions. Overcoming an RT call requires a deposit or liquidation.
Day trading introduces additional complexities, governed by rules like the Pattern Day Trader (PDT) rule, which mandates a minimum equity value of $25,000. Violating this threshold results in Equity Maintenance (EM) calls and subsequent Day Trade (DT) calls if day trading persists. These calls can be lifted through increased equity or marginable stock deposits.
Maintenance margin requirements add another layer of complexity, necessitating investors to maintain at least 25% equity relative to the total market value of margin securities. Falling below this threshold triggers Required Maintenance (RM) calls, restricting provisional buying power from pending deposits until the equity is restored.
Regardless of the type of account, vigilance is paramount. Cash account traders must monitor unsettled funds, while margin account traders need to track day trades, buying power, and equity values. In the face of Good Faith Violations or margin calls, a strategic and measured approach to remedy the situation is advised, whether through deposits, liquidations, or adjustments to trading strategies.
In conclusion, it is crucial for traders to approach margin trading with a clear understanding of the associated rules and risks, including the pattern day trading rule, distinctions between day-trading buying power and overnight buying power, and the potential implications of margin calls. The risks inherent in margin trading underscore the importance of informed decision-making and risk management to mitigate potential losses and navigate the intricate landscape of financial markets.
