Month: September 2024

Introduction

Fractional Share Trading has quickly become a game-changer for many traders and investors.

This somewhat innovative approach allows you to trade fractional shares, which means traders can buy and sell a portion of a stock rather than the entire share (thus making the whole process more affordable).

In this new article, we’ll look into what fractional share trading means for traders, why it has become so popular, and how it can help you optimize your investment strategy.

What Are Fractional Shares?

As I’m sure most people will be able to gather by their name, fractional shares are nothing more complicated than a fraction of a whole share.

Traditionally, stock purchases required you to buy whole shares, which made it hard for traders with smaller accounts to make any significant gain, especially for high-priced stocks.
If, for instance, you wanted to invest in a company like Amazon or Tesla, a single share would cost you thousands of dollars. But, with fractional shares, you can invest in these companies with much smaller amounts of capital.

For example, if Amazon’s stock is priced at $3,000, you can purchase just $300 worth, giving you 0.1 of a share.

In a way, this ability to trade fractional shares democratizes access to investment opportunities, also allowing individuals with smaller portfolios to diversify and invest in higher-priced stocks that would otherwise be out of reach.

Why Retail Fractional Share Trading is Gaining Popularity

It is easy to see the reasons why this benefits-packed innovation has attracted so many traders but quickly go through the most evident among them.

Accessibility and Affordability

Fractional share trading lowers the barrier to entry for many retail traders and investors. Brokers were quick to notice that the youngest generation of traders, (particularly those just entering the market), were struggling to find ways to grow their portfolios without needing a substantial initial investment. They answered by creating the opportunity to trade fractional shares. This enables investors to start with whatever amount they feel comfortable with, making investing more approachable.

Diversification Made Easy

Fractional shares also enhance traders’ ability to diversify.

In traditional trading, the need to buy whole shares made diversification almost impossible for traders with smaller accounts and, of course, investing large portions of one’s portfolio into a handful of expensive stocks could lead to massive strategic risks.

However, with the ability to trade fractional shares, traders can spread their positions across various sectors, thus minimizing risk.

For instance, suppose you want to invest in technology, healthcare, and energy but have only $1,500 to invest.

With traditional share buying, you might end up buying one share of a tech stock and a handful of cheaper stocks, limiting your exposure.

With fractional shares, you can allocate $500 to tech giants like Apple or Microsoft, $500 to Pfizer in healthcare, and the remaining $500 to an energy firm like NextEra Energy, thereby diversifying your investment even with a modest amount.

Innovative Trading Platforms

The rise of trading platforms like Robinhood, E-TRADE, and Charles Schwab – for investors – has made fractional shares even more popular.

These platforms are designed with user experience in mind, making it easy to buy and sell fractional shares without excessive fees.

Zero-commission trading on many platforms has also contributed to its appeal, providing retail traders with a cost-efficient way to participate in the market.

Fractional shares for traders

Fractional share trading also offers several specific benefits to traders as opposed to long-term investors. All in all, it significantly enhances the whole trading experience – especially for the more active traders.

It offers flexibility, lower barriers to entry, and a more tailored approach to managing risk in any market conditions.

For example:

• Traders can quickly enter and exit positions without needing to commit to the cost of whole shares. This allows for agility in responding to market movements.
• Since fractional shares allow for smaller investments, traders can manage risk more effectively by only allocating a portion of their capital to each trade.
  This can help minimize losses on poor trades.
• In a volatile market environment, traders often need to make quick decisions. Fractional share trading allows them to swiftly adjust their positions without the constraint of buying or selling whole shares.
• Traders can engage in day trading or short-term strategies with expensive stocks that might otherwise be out of reach if only whole shares were available.
• Fractional shares allow traders to take advantage of multiple trading opportunities within a single day, spreading investments across various stocks without the need for significant capital.

Potential Downsides to Consider

As you can see, trading fractional shares comes with numerous advantages for both investors and traders but it’s important to also consider the potential downsides.

For one, the lack of voting rights can be a drawback for some long-term investors.

Typically, owning a full share grants you voting power at shareholder meetings but, with fractional shares, that power can be limited or non-existent, depending on the broker. Although this might not be an issue for day and swing traders, longer-term investors need to be aware of it.

Also, executing orders for fractional shares sometimes come with some limitations.

Although most brokers are working to integrate better fractional trading capabilities, there may be instances where the availability of certain stocks is restricted, particularly during periods of high volatility.

Finally, it’s important to consider the fees.

Many platforms offer commission-free trading, but there may still be some hidden costs or spreads, especially around high-volume trades or less liquid stocks. So, be aware and always read the fine print.

Conclusion

Retail fractional share trading is reshaping how small traders and investors interact with the stock market and, by doing so, they are allowing for a more inclusive investment landscape.

Whether you’re looking to trade expensive, high-growth tech stocks or diversify into other asset classes, fractional shares could be the key to further improving  your investment strategy.

So, if you haven’t already explored this avenue, now might be the right time to dive in and trade fractional shares and… even better than any retail broker, Trade The Pool is the perfect place to start!

Hope this helps.

Introduction

There is no doubt, day trading can be a very exciting way of making a living. The focus, the fast-paced decision-making, the constant duel between buyers and sellers, and, of course, the potential profits are what make so many traders want to be day traders. However, as for all good things in life, there is a “but”; and for day traders, this “but” is represented by the PDT Rule.

In today’s article, we’ll learn what the PDT rule is and how you can avoid the PDT rule without sacrificing your trading ambitions.

What is the PDT Rule?

The Pattern Day Trader Rule (or PDT rule) is designed to protect inexperienced traders from excessive risk, but it has quickly become a thorn in the side of anyone looking to day trade. 

Established by the FINRA (Financial Industry Regulatory Authority), the PDT rule dictates any trader who executes four or more day trades within five business days is to be considered a pattern day trader and that all pattern day traders are required to maintain a minimum balance of $25,000 in your trading account at all times.

If the trader’s account doesn’t meet this minimum balance requirement, he or she will be limited to only liquidating trades, and that could cripple anyone’s trading strategy.

So, are there any ways traders with an account under $25k avoid the PDT rule, and if so, what are they?

Well, the article’s title gave that away.

Yes. There are ways. There are five ways, to be precise. Here they are:

Option 1: Increase Your Capital to at least $25,000

While it may not be the most realistic and practical solution for all traders, one way to bypass the PDT rule, of course,  is to simply fund your trading account to meet the $25,000 requirement.

This is a straightforward step, but it requires a greater capital that not every trader would be able to invest or willing to risk. If, however, you have the financial means, know that this option allows you to day trade without any restrictions.

Option 2: Open a Cash Account

Another way to avoid the PDT rule is by opening a cash account instead of a margin account.

With a cash account, there is no limit to the number of day trades as long as you have enough settled cash to pay for your purchases.

This means that while you won’t be able to day trade the same cash across multiple trades during the same day, you can still buy and sell positions as long as you wait for the previous trades to settle (which takes two business days).

Remember that trading from a cash account will allow you to avoid the PDT rule but will also greatly affect your ability to use leverage.

Option 3: Switch from day trading to swing trading

We understand that day trading and swing trading can be very different activities, and we also understand that passing from one to the other often involves having to create an entirely new strategy and trading rulebook but, to give a full view of all possible options, we had to include this one too.

As a swing trader, you would execute fewer trades and less frequently which would protect you from falling victim to the PDT rule.

Changing the type and style of trading can be challenging at first but, once used to it, you’ll realize that swing trading can be as rewarding and exciting as day trading.

Option 4: Trade Forex or Futures

If you want to avoid the PDT rule but also want to remain a day trader, you could consider trading the Forex (foreign exchange) market, or futures markets.

The Forex and the Futures markets are not as strictly regulated as the Stock market and the PDT rule does not apply.

The Forex market is open 24/5, allowing for lots of opportunities to day trade and futures trading can offer substantial leverage and, most importantly, trading either means you won’t have to worry about the PDT rule at all.

However, do keep in mind that switching from stocks to currencies and futures will also require new research, learning, and trading strategies.

Option 5: Utilize a Proprietary Trading Firm

If you love day trading and stock is all you care about, this is the perfect way for you to remain a stock day trader and avoid the PDT rule at the same time: Join Trade The Pool, the stock prop trading firm!

Trade The Pool allows you to day trade stocks using their capital rather than your own, which means you won’t have to part with $25k of your hard-earned money or switch to swing and futures trading unless you really want to.

If you are wondering how this is possible, remember that the PDT rule was introduced to protect small traders’ capital, but since you’d be trading TTP’s capital rather than yours, the PDT rule doesn’t apply.

Furthermore, while free from all PDT impositions, by signing up with Trade The Pool, you also gain access to various trading and research tools as well as a supportive environment.

If you are worried about not being capable or experienced enough yet, stop worrying; by taking a look at the website, you’ll find that TTP provides lots of educational content including this blog, ebooks, interviews, live trading videos, and much more. It doesn’t cost anything and can be greatly beneficial for traders looking to sharpen their skills.

Conclusion

All of these four options will allow you to avoid the infamous PDT rule and, although it could mean having to change the way you trade, who knows, you might end up being more successful in your new discipline than you were at day trading.

However, if you read this article because you feel you are at risk of breaking the PDT rule, you are probably a stock day trader. And if you are a stock day trader it is because that’s what you love doing and have trained to do.

Well, at Trade The Pool, the team believes that talented traders should be allowed the freedom to do what they’re good at; and if that happens to be day trading stocks, then so be it. They’re behind you all the way.

This is why, if you love stock day trading and want to avoid the PDT rule while remaining true to yourself, option 5 is the one that makes sense.

I hope this helps.