Pattern Day Trade Margin Call!

I received a margin call today and learned what I did wrong. After looking throughly at my brokerage margin rules I "thought" I had figured out how to use margin. Boy was I in for a surprise.

Mistake- I was already listed with "free-rider" violations in January and this came back to haunt me. Due to a 90 day penalty for the violations I am unable to have trades in cash be immediately transfer into margin until settlement of the trade. Settlements usually take three days from the day you purchased the equity. I purchased a stock in cash and overused my amount by just a little over $2000 hence receiving a margin call for the amount. The trade did not automatically transfer into margin because of my past violation and I will have to wait until Friday till I can trade again.

Luckily the pattern day margin call has five days to clear and so my trade in cash will move into margin by Friday. If only I could have bought $2000 less of equity I would have had enough for the $25k requirement in my margin account, damn.

To clarify the situation I will explain the significant penalty with a free ride violation. When you purchase a stock with cash, you need to let the trade to settle. The settling date will take time, usually three days. Once the trade is settle, you are allow to sell the stock. If you trade the stock and you use the proceeds to purchase another stock before the settlement date of the first stock you have incurred a free ride violation. What irony for once in my life I don't want something for "free" that is a free-riding violation. Dang.

The Federal Reserve Board formed a rule "Regualtion T" where trades made in cash require a T+3 days in order to settle. "T" is the trading day and plus three days. When you have a free ride violation, the account can only be trading in cash. However the cash trade must settle before you can use the cash again. Time is money!

When an account does not have a free ride violation and you make a trade in cash with the full amount in your core account, you actually do not have to wait T+3 in order to trade with the cash. At first it's appears deceiving until you realize the simplicity of this rule. The reason an account without a free ride violation can use the cash trade on the same day, before settlement, is because of margin. The cash used to move into the trade may be moved into the unsettled portion of the account, but the cash amount is still considered apart of your $25k limit for a pattern day trader margin account. That way you can still trade with margin even though the cash unsettled for the trade will not effect the buy power of the account. Remember though the trade must still be settled in order for the user to again trade the proceeds from the cash trade. Take note that most brokerage will draw your cash trade into your margin after settlement, which is what I am aiming for. I just didn't know about the settlement deal until today, damn.

I had many stocks in mine to short today and it was a wonderful day for shorts, too bad I suffered from a gain. I actually have a lost right now from the cash trade I made yesterday :(

I can look at the bright side, by Friday I will have my buy power back and probably doubled because the equity I purchased had a 30% margin requirement. Either way I learned a little more about the rules and regulations.

Hey it could have been worse, I could have lost every $$$ by now after all those mistakes I made. Geee, I really wonder how fair I can go with this. I just hope I can break-even before the end of the year. Again I remind myself, "take what you can get, and nothing more."