• Day trading was virtually unheard of until the tech boom of the late 1990s.manhattan image by manuelclerc from Fotolia.com
  
  Day trading was virtually unheard of until the late 1990s. The development of new technology that allowed desktop trading coincided with a major boom in the market that attracted new investors. Day trading carries potential system risks because, as speculators, day traders can artificially inflate or deflate a stock's value. By nature, day traders are not long-term investors and care little for the actual value of the instruments they trade. SEC rules on day trading applies to trading stocks, options and other securities.
  
  

Definition

• The SEC defines a day trade as one in which a security is bought and sold in the same day or sold short and repurchased in the same day. The result is that the trader ends the day without a position in the security. SEC regulations on day trading only apply to traders who meet the definition of a "pattern day trader," which is someone for whom day trading is more than six percent of his total trading activity in a period of five business days and who has completed at least four day trades during that time.
  
  

Equity Requirement

• A pattern day trader is required by SEC rules to have a minimum $25,000 of equity in her trading account on any day she completes day trades, and the required equity must be in the account prior to any day-trading activity. A violation of this $25,000 requirement will prevent a pattern day trader from completing a day trade until the account is restored to the minimum equity level.
  
  

Disclosure Requirements

• SEC rules on day trading also extend to brokerage firms, which are required to provide risk disclosures to clients and account holders. The statement must inform about the risks of day trading and against funding day-trading activities with retirement savings, student loans, second mortgages, emergency funds, tuition money or rent. The broker must also approve each individual account for day trading, and enforce the equity requirement if pattern day-trade activity emerges, or obtain a written agreement that the customer does not intend to use the account for day trading.