What Happens When You Have $25,000 in Your Brokerage Account?

$25,000 is the magic number. It's how much you should have in your brokerage account when you day trade (buy and sell the same security on the same day). It's fine to day trade here and there with less money, but if you do it too much, watch out: your broker will flag you as a pattern day trader.

A pattern day trader is someone who day trades at least four times within five business days on a margin account. Once you're flagged, your brokerage runs some detective work. Are you using a margin account? Do you have less than $25,000 in your account?

If the answer to both questions is yes, then bummer for you -- your broker will boot you from your margin account. It may downgrade you to a cash account, which means saying bye-bye to margin loans. In extreme cases, you might be forced to switch brokers.

Why do you need $25,000 to day trade?

The Financial Industry Regulatory Authority (FINRA) enforces the $25,000 rule. It's not just your brokerage; it's all of them. The reason FINRA enforces the rule is simple. Day trading is risky, and the $25,000 cushion makes it less likely that you or your broker will end up deep in debt.

It's worth remembering that margin is leverage. You can easily lose more money than you invest by trading with margin, and day trading on margin is risk squared. It's probably for the best that you've got a squishy cushion -- cash and stocks -- to fall back on if you need to.

Keep your margin account topped up at $25,000 to keep your account unfrozen. If you don't have that kind of cash, there are other ways to trade stocks.

Small accounts can trade stocks, too

You can trade stocks without having $25,000 in your account. 

One way is to day trade less than four times per five business days. The catch is that limits your trading, but if you don't trade much anyway, it's a solid option.

Another way to trade stocks with a small balance is to stick with a cash account. You can day trade as much as you want with a cash account, since your broker isn't spotting you. The caveat is you can't use margin with a cash account.

Finally, you can use multiple brokerage accounts to trade. On the upside, there's a handful of great brokers for day trading, so you're not strapped for choice. The downside is, juggling multiple stock brokers can be a pain. Plus, it reduces how much you can buy on each platform.

Once a pattern day trader, always a pattern day trader

Once your broker flags you as a pattern day trader, it'll keep you flagged even if you stop, generally speaking. That's a problem if you want to trade on margin, but you don't want to keep your account topped at $25,000.

Not a pattern day trader? Call your broker to explain your trading situation. It may unflag you, especially if your recent trading habits have broken the pattern.

This only applies to margin day traders, not investors

If you avoid margin and day trading, don't worry -- you're safe. FINRA's $25,000 rule only applies to the riskiest accounts that meet specific criteria, outlined above. FYI, IRAs that allow for limited margin trading also enforce the $25,000 pattern day trading rule.

You can open a margin account if you have at least $2,000 or 100% of a security's purchase price (whichever is less) deposited into your account. These requirements are separate from FINRA's pattern day trading rules. 

You can open a cash account, the standard brokerage account, with as little as $0, depending on your online brokerage. Cash accounts are less risky, and most people are better suited to investing in cash accounts than to pattern day trading.