Arbitrage is the simultaneous purchase and sale of the same security in different markets to profit from minute differences in the security’s price in these markets. Because arbitrage provides a mechanism to ensure that any deviation in the price of an asset from its fair value gets corrected rapidly, arbitrage opportunities seldom last long.
Why Don’t Day Traders Hold Positions Overnight?
Day traders typically do not hold positions overnight for a number of reasons: Most brokers have higher margin requirements for overnight trades, and therefore additional capital is required; a stock can gap down or up on overnight news, inflicting a big trading loss; and holding a loss-making position overnight in the hope that part or all of the losses can be recouped may violate the trader’s core day-trading philosophy.
What Are the Margin Requirements for Day Traders?
According to the Financial Industry Regulatory Authority (FINRA) rules, the minimum equity requirement for a client of a broker-dealer who is designated as a pattern day trader is $25,000, which must be deposited into the client’s account prior to any day-trading activities and maintained at all times.7
What Is Day Trading’s Buying Power?
Buying power refers to the total funds that an investor has available to trade securities, and it equals cash held in the account plus available margin. According to FINRA rules, a broker-dealer client who is designated as a pattern day trader may trade up to four times their maintenance margin excess as of the previous day’s close of business for equities.
The Bottom Line
Although day trading has become somewhat controversial, it can be a viable way to earn a profit. Day traders, both institutional and individual, play an important role in the marketplace by keeping the markets efficient and liquid. Though day trading remains popular among inexperienced traders, it should be left primarily to those with the skills and resources needed to succeed.