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3 things every trader should know

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Credit: Kaspars Grinvalds

If you are relatively new to trading and investing, it is important to know some of the key terminology as you develop your strategy to enter this arena. Even if you’ve been at it for a while, chances are you haven’t encountered all the terms below. All the top brokerage sites offer educational sections that include libraries, tutorials, video courses, and dictionaries of investing terms. It’s a good idea to spend at least an hour per week acquiring new knowledge and adding to your arsenal of trading techniques. The following three terms are a good place to begin.

What is account settlement?

This little term can really trip you if you are unaware of it. Every brokerage firm is different, but most have specific settlement dates for trades. So, if you sell 100 shares of ABC stock for $10 each, your account will be credited with $1,000. But, due to the time it takes for transactions to settle, the money won’t be in your account, in most cases, for three business days. Why is this important? Because even though you just sold the security and have the money coming to you, you’ll not be able to use that money for three business days. Be sure to ask your broker about the firm’s specific settlement rules for stocks, options, futures, bonds, and other securities.

What is the PDT rule?

The PDT, or pattern day trader rule, was put in place in 2001 to help new investors from getting into financial trouble. What is it? Simply put, your broker will tag you with the PDT designation if you do more than three round trip transactions within a 24-hour period, all within a 5-business-day period. Once you fall under the designation, you will have to bring your account balance up to $25,000 or trade without using any margin.

If day trading is your main investing technique, speak with your broker about some of the other rules that you might have to meet if you want to close all your trades before the day ends. If you continue to place round-trip trades within single market sessions (days), but don’t have enough capital in your account, your broker has the right to freeze all your activity, and account, for up to 90 days.

What is short-selling?

One of the most common questions people ask brokers is about how to short stocks, and how to do so profitably. Shorting is actually a rather complex transaction, but in simple terms, it’s the act of agreeing to deliver shares to someone else, at a specific price, on a set day. Note that you do not need to already own the shares to enter this kind of transaction.

An example is if I agree to deliver 10 shares of XYZ stock to you tomorrow, and charge you $50 per share, you pay me $500 right now to seal the contract. Tomorrow, regardless of the new price of XYZ (whether it’s higher or lower than $50) I’ll go onto the open market, but 10 shares of XYZ, and give them to you. If the price has gone down in the meantime, I make a profit. If it’s risen, I lose out.

Story by Drew Allen


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