Trading Laws And Rules For Beginner Traders
Table of Contents
- Trading Laws You Must Know
- Quick Rules To Get Better At Trading
- Final Thoughts
Trading stocks is one of the most popular ways to increase assets and wealth. Trading stocks is definitely not easy for beginners. This is why there are lots of rules, regulations, and laws to help the stock market run smoothly.
Since the stock market is a complex place, the laws and rules also help beginner traders and investors. If you are new to stock trading, these laws will help you better understand the market and make more informed decisions.
Trading Laws You Must Know
There are mainly three trading laws in the stock market. A brief description of these laws is given below-
1. Settle Trades
The settle trade dictates that when you buy or sell a stock, you need to settle its transaction within fixed business days.
This settling cycle for buying stock is also known as T + 3. The stock brokerage firm will accept payment for any securities you buy within three days.
If there is any more delay, the brokerage will not accept your payment.
If you wish to sell something, then that cycle will be T + 1. This means if you are selling a stock, you will have to complete the transaction within the next business day.
Most of the time, choosing the right stock to buy and sell can be difficult. To help ease the process, you can use research tools like atom finance to better analyze your stocks before making a purchase.
2. Free Riding
In the world of trading, free riding refers to the act of buying and selling shares using a cash account without even having money to cover the trade.
If you buy and sell a particular share without paying for it, you are free riding, and this is considered illegal. Being involved in an underwriting syndicate to withhold shares and sell them at a higher price later is also considered free riding.
Freeriding is a clear violation of Regulation T of the Federal Reserve Board. Regulation T is actually a series of provisions to guide traders on how to use their cash accounts for trading and how much credit they need to execute a trade.
A violation of Regulation T can lead to the suspension of a trading account. This indicates how severe the consequences of free-riding are.
Free riders take the advantage of settlement times. Different securities and stocks have different settlement dates and times. If a trader buys a share that has three days to settle, they can sell it and use the proceeds to pay off the initial purchase price.
To make sure you are not free riding, you need to ensure two things. One is that you need to have sufficient money in your account; you cannot exchange if your account has no money. The other thing is that you will make a full-cash payment for the security before you sell it.
If you fail to follow these, the broker may freeze your stock account for at least 90 days.
3. Margin Requirements
Margin requirements mean how much you are allowed to borrow when you are purchasing stocks using a margin account. This is determined by the Federal Reserve’s Regulation T. They decide how much you can borrow.
The initial margin for borrowing is usually fifty percent, and the maintenance margin requirement is thirty percent.
If you buy a stock using margin, you need to keep a minimum amount in your margin account. The margin requirement rule states that you must have a minimum of 25 percent of the total market value in your margin account all the time.
These are the laws you must abide by when trading stocks and securities.
Quick Rules To Get Better At Trading
Aside from the legal consideration, you must also follow some rules to become a successful trader. Here are some rules that are especially useful for beginner traders-
1. Think Of It As Your Own Business
In a normal business, you sell something, and you get the money that justifies the value of that product. If you buy something, then you pay an amount to the seller for the product.
Stock trading is not much different from a business. There may be some differences in the method of exchange, but the basics of trading are the same.
If you want to get good at trading, you need to consider it as your own business instead of thinking of it as a quick way to make money. Sometimes you will have to suffer financially, but even then, you need to stay calm and calculated.
2. Do Not Take Unnecessary Risks
Many times, we see investors investing too much on one single stock, only to find out that the value of that stock gradually decreases over the next few months. As a result of that, they face a huge loss.
Do not make such risky decisions. Yes, you do need to take risks because some risks offer better rewards, but do not go all out on one stock hoping to make a fortune out of it.
Instead, invest in multiple stocks in low amounts. This method is called risk diversification; it is the safest way to reduce losses.
3. Know When To Stop
Most businessmen have a sense of pride and still want to trade even if they face loss after loss.
Do not have such a mentality. You need to be bold and make dangerous decisions, but that does not mean you should take decisions based on a whim.
You need to know when to stop. Take some time off, rethink your plans, and start off fresh.
4. Devise A Good Strategy
You need to have a clear and well-thought-out strategy before even thinking of trading.
A long-term plan can help you analyze the stocks, market, and potential risks better.
Know how much you can afford and the type of stocks you need to invest in.
Research that product and see the stock reports. If it shows promising growth, stick to it and invest in it.
5. Use Technology Properly
Technology can aid in many ways. For example, many software nowadays will help you determine how your trade exchange will be through various simulations.
You can test your trading plan through these simulations; find the strengths and the weaknesses in your plan. With the help of technology, you will also be able to determine the future value of a stock by looking at the market pattern. This method is known as backtesting.
There are also various charting platforms. These charting platforms offer traders various ways to view and analyze the markets.
A stable internet connection can also help you in your trades. The stronger and faster your internet is, the better your trading performance will be.
6. Keep On Learning
As you spend more and more time trading, you will understand the shortcomings of your current strategy and find new ways to improve it.
You need to stay updated with the current market trends, learn about the up and coming companies, and gain better insights by going through newsletters and journals.
7. Do Not Overtrade
This is another mistake that most new traders make. When they see signs of success, they try to increase the number of trades in the hopes of increasing profit.
This may sound promising, but in reality, if you overtrade and do multiple transactions at once, chances are you will lose track of the market conditions and make wrong decisions. The conditions in the market change quite often, and one wrong mistake made from greed is enough to ruin your entire plan.
At best, you should make five transactions per day because you will be able to easily process the information of five transactions. Any more than that might just be overwhelming for beginners.
Stock trading is a promising way to earn good money. But you have to know the ins and outs of it. It also requires you to invest a lot of time. Since the market is lucrative and often competitive, you should be aware of the laws we discussed and consider the insights we have discussed to make the best of trading.