When Is Day Trading Illegal?

Day trading stocks in itself is not illegal. Nor is it a bad way to make money either. There are millions of people across the world that do just this each day and some make 6 figure incomes each year or more. Day trading involves buying stocks and then selling them, usually the very same day. Most of these stocks day traders use are traded on the pink sheets or the Over-the-Counter Bulletin Board (OTCBB), usually referred to as penny stocks. While a penny stock does not always mean a stocks cost is measured in the pennies, it usually means it is not expensive. Day traders trade in high volumes of stocks, millions even, buying them and selling them for profits. It is a tricky business, but one that can be very profitable if you know what you are doing. While not illegal, this method of investing not long term towards a company or fund’s growth but on minute stock movements and market pulls is frowned upon by many investors. Old-school investors see day traders as charlatans, investing as a means of gambling. While not liked, day traders are certainly not breaking the law.

When Day Trading Turns Illegal

If days traders follow the rules put out by the Securities and Exchange Commission (SEC) and are not committing fraud, then they are within the bounds of the law. When these bounds are crossed or even stretched, then illegal day trading is happening. The most common way day traders get themselves in trouble with the law is by pumping stocks. Pumping stocks involves an investor pushing a stock either up or down using false information in an effort artificially affect a stocks price. An example of illegal day trading using the pumping stocks method, usually called pump and dump as the stocks used herein are later sold rapidly is this:

Trader buys 100,000 shares of stock X in company X. The stock is bought cheap; say for $.25 a share. The cost to get invested for the investor is $25,000

Trader then goes on finance websites which have stock forums such as Yahoo Finance and starts talking up the stock in company X saying its about to explode. Not quite illegal day trading yet, but on the way. Then the trader spasm email boxes to people telling them this stock X is going to explode in price, and soon. Illegal. Trader may even go further such as using proxies to buy up more of the stock X to make it seem like people are buying the stock rapidly and in huge volumes.

While this example may be extreme, it happens and helps exemplify the point of what happens when day traders cross the line. Some investors illegally day trading operate with overseas partners. Some will even generate false news press releases to help their pump and dump scheme work better. Pumping stocks is illegal, and illegal day trading can lead to fines or imprisonment under U.S. law.

When Is Day Trading Illegal?

When Day Trading Turns Illegal

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