Margin

The only way for me to purchase a stock and sell the stock on the same day and utilize the sales proceeds was to have a margin account. The account has no fees, but one needs to have their brokerage to qualify them for a margin account. Usually brokerage asks participants financial questions and checks their credit history before they are eligible for a margin account.

Within a margin account there are a few basic rules that must be followed at all times. I made a mistake by saying "few" when in fact a margin account can get very confusing.

Mistake 1) When I obtained my margin account I thought I could immediately trade stocks with no limits other than how much I can borrow. There is a restriction of how much one can borrow when performing day trades. The restriction is four times the present day trader's buy power. Buy power is essentially the amount of cash and margin in the trader's account. Of course there is many variables involved in computing one's buy power. (For beginners I advise you to look further into this yourself, the rules of a margin account, before you obtain one.)
Of course my mistake was not learning all the rules involved.

Is it a Pattern or Not?

There are two types of equity traders. Pattern day traders and Non-pattern day traders. To qualify as a pattern day trader the trader must execute four or more trades with the use of margin within five trading sessions. When you purchase a equity and sell it, there lyes two trades. Hence if you open and close two particular equities within five trade sessions, you automatically qualify as a pattern day trader. Any quantity of trades less than four within five sessions is a Non-pattern day trader. It is very important to know which type of trader you are because there are minimum equity, dollars, requirements enforced by your brokerage. In the case of mine, a Non-pattern day trader must have at least $5,000 dollars in their account in order to perform margin trades. A pattern day trader must have at least %25,000 dollars in their account in order to trade on margin. If at any time owner of the account does not have the minimum equity in their account their brokerage will send him/her a "margin call."

Basically a margin call is a warning that you have to apply a certain amount of equity into the account if you want the account to be intact. For instance if you were a pattern day trader and your account net total equity is $26,000. It just so happens you purchase a stock and you closed the stock with a lost of $2000. Your account total is now $24,000. By the end of the trading session you were unable to achieve $25,000 then a margin call is issued to you. The margin call asks you to provide an additional $1000 in equity in order to not have the account restricted. The time you have to resolved the margin call ranges from three to five days, depending on the type of margin call. The example I gave is just one way of encountering a margin call.

When a margin account is restricted owner usually losses their possessions of stocks that are still open. Their brokerage will sell the owners open stocks without notification and all of this is legal. Whether or not the stocks had a gain or loss the brokerage will automatically sell stocks until the owner has achieve enough cash/margin in order to satisfy the margin call. Another restriction is the day trader buy power is no longer a factor of four but a factor of one. In the case described earlier the owner with $24,000 would have this restriction. Until owner is able to satisfy their margin call will the restrictions be uplifted.

Confused yet. I believe one can understand margin rules and regulations much better if they themselves get involved. Get a margin account if you are qualified only until you feel comfortable and knowledgeable about margin. By using margin you can actually see what is involved. Today I am still learning and I will elaborate continuously about margin as I trace back my pass trades. Next session I will talk about how I lost nearly $10,000 in two days.

Before I end, a few basic traders terminologies may need to be define. "open" stock means you just purchase the stock and holding it within your account. When you have a "closed" stock it means you have sold the stock and no longer holding it within your account.

You can have "stock" be also called "equity" and have "equity" be defined as your net amount in your brokerage account.

The past does hurt...

I should have learned how day trading works and how trading equities operate before I made my purchase of "C". Now for my continuation after my first buy/sell equity.

On the same day I sold "C" I immediately used the proceeds to purchase Sallie Mae "SLM" at $17.847/share for 1000 shares. In two hours I sold the shares at $19.17/share for a total profit off +1323 excluding commissions and fees.

Thinking I just made my first gains with such ease and swiftness I decided to trade other stocks on the same day. Little did I know I had violated many of the fundamental rules of the stock exchange.

Mistake 1) I purchased "C" with cash and when I sold it, I did not know that my proceeds would not be in my account balance until after three business days with starting date being when I sold the equity. My mistake was that I initiated another trade on the same day with the same proceeds. You can not do that and I was notified with a violation letter.

Mistake 2) I further incurred two more violations because for the next three trading sessions I was trading in and out of equities with the same amount of cash. My account was then listed with a restriction for 90 days from trading.

My heart just sank. After three sessions of trade I never was notified, online, that I was breaking any rules or regulations. I only found out when I opened the first violation letter three days after I made the violations. A glimmer of hope poke through when I learned about Margins after speaking to one of my brokerage representatives.

This is to much to bear because it was just too painful to recount about all the dumb mistakes I made financially. Yet by blogging I can remind myself and others what NOT to do in stock trading. I will elaborate on Margins in next post.

History

I must reiterate all my trades in order to learn from my mistakes. This means I will have to back track my transitions starting with my first stock.

On Jan 15, 2008 I purchased 1000 shares of Citigroup Inc, (C), for $27 and $19.95 for commission. A purchase total of $27,019.95.

Mistake 1)- The reason I went with this stock was because I thought it had bottomed. I was wrong. The stock drop for four consecutive sessions. Never assume until you have done thorough research on the stock you are purchasing. Read about their pass "income statements" and refer to the stock ratings from financial institutions such as Goldman Sachs. Never blindly get involved without research. (Still to this day I am making this mistake.)

Mistake 2)- I couldn't bare to watch the price fall any further and decided to cut my lost. On the fifth session of owning the stock I sold it. That was a mistake. The night before there was a global stock market free-fall. Never follow what the market does. I anticipated a dreadful day and so did everyone else. On 1/22/08 NYSE initially fell over 400 points. I immediately sold my stocks for a dismal $22.51 a share. The total came out at $22,489.70 including fees and commissions. The federal revenue immediately lowered interest rates and stocks went back up. (C) ended the day at $25.40 :(

For my first ever stock trade my total profit became -$4550.2 including all fees and commissions.

I would continue making mistakes and will disclose them in later posts.

State Tax on Capital Gain

Out of all the states I could have been living I had to be in Massachusetts. Don't get me wrong, I love this state, but short term capital gains are taxed at a ridiculous rate of 12%! That means up to 47% of all my short term capital gains are paid back to the government. Yikes!

Interestingly, to me, the federal taxes long term capital gain is at 15% and Massachusetts takes 5%. So if I hold a stock for one year or more and sell it with a net gain, I am only taxed 20%. I did further research into the Massachusetts tax laws and found the following excerpt in the 2006 Guidebook to Massachusetts Taxes. (Listed on Pg 38)

Sorry for the small tax size but I didn't feel like typing every word of the excerpt.

What is interesting is in Part C the former method for taxing capital gains in Massachusetts was a huge incentive to long term share holders. If a stock was held for six years or longer and the owner sells it he/she would not have their net gains be taxed under the state's tax laws. Remarkable, but unfortunately they amended Part C at the end of 2001. Darn it! One more reason to hold stocks short term. To me 5% or 12% is not that much of a difference if I consider gaining on every short term trade. I know that's highly unlikely.

Oh if I am wondering, yes to date I have not filed my 2007 taxes yet. I still have two weeks.... give or take a few days.

Initial Fears...

Have you ever felt afraid of doing something because you weren't familiar with it? Yet you hear people who tried that "something" expresses great satisfaction. Like you first time riding a roller-coaster or first time on a two wheel bicycle.

Anyways the initial fears I have in playing stocks comes around the year after. Taxes. Both the Federal and State taxes returns do not favor day traders. I remember reading in an article stating the most complex portion of the federal tax returns is related to Schedule D. Before I continue I must admit I did not learn many of the parameters all US tax payers must obey upon until two months into day trading stocks. I still am learning about taxes today!

In the case of the federal taxes any short/long term capital gain/loss is required to be filed on schedule D. Trades that are "wash" sales must also be included in schedule D. "Wash" sales is defined as a stock you sold at a lost and is excluded as a capital loss if you re-purchase the stock within a month, 30 day time period. (The Wash sale rule was created to prevent one to offset gains from the same stock.)

Capital gain/loss-
Any gains I make in a stock that I own less than one year is taxed at the same rate as my ordinary income. So if hypothetically make over 357,700 in short term capital gain, by tax rate will reach all the way to 35%.

2008 Tax Brackets

Tax Rate		Single	Married Filing Jointly
10%		Not over $8,025	Not over $16,050
15%		$8,025 - $32,550	$16,050 - $65,100
25%		$32,550 - $78,850	$65,100 - $131,450
28%		$78,850 - $164,550	$131,450 - $200,300
33%		$164,550 - $357,700	$200,300 - $357,700
35%		Over $357,700	Over $357,700

Its important to note that the tax rates are calculated in stacking method. For instance if I, single, let say made 30k taxable income for 2008. I would pay the first $8025 at the 10% and what is left over of the 30k, $21975, corresponds to a tax rate of 15%. My total tax payment comes out to be $4098.75, which is 13.66% of my income. Before I get all jumpy and happy I need to add the state tax. I think this is all for now, I will continue tomorrow.

First Post!

I started my journey of trading stocks on Jan. 08. With a starting income of approximately $28k. I need to catch up this blog with my trades and in due time I will. For now as of to date, 3-24-08, my income for trade is approximately 14.5k.

Indeed I lost half of my savings, but to get things worst I am borrowing money and I have been spending approximately 80% of my income each month since I began trading stocks. S**T!

I will recount my trades in order to remind myself the painful mistakes I have made. This is also good for readers who would like to know how to trade stocks but do not know how to. I too am a beginner in trading stocks.