Understanding the Basic Trading Rules of the US Stock Market
Key Takeaways
- The US stock market follows a T+0 trading system, which means stocks bought today can be sold today. The minimum trading unit is 1 share, making trading flexible and convenient.
- There is no daily price limit in the US stock market, but a three-tier circuit breaker system is in place to pause trading during sharp market declines.
- Dividends received by non-US investors are generally subject to a 30% withholding tax, while capital gains from stock trading are usually not taxed by the US.
- If your account equity is below $25,000, you should pay attention to day trading restrictions to avoid trading limitations.
- Through its partner licensed broker, MEXC provides access to the US stock market. The stock assets are held in the user's name and belong to the user.
Through its partner licensed broker, MEXC offers global users access to trading in real shares of publicly listed US companies. Users can directly buy and hold stock assets, benefit from stock price movements, and enjoy shareholder rights. Before you begin investing in US stocks, it is important to understand the market's trading rules in full. Doing so can help you build a more complete investment framework and make more rational investment decisions.
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1. Core Trading Rules of the US Stock Market
1.1 Minimum trading unit
The minimum trading unit in the US stock market is 1 share. Compared with the A-share market, where purchases typically start from 100 shares, and the Hong Kong stock market, which trades in board lots, the US market has a much lower entry threshold. This system allows investors to allocate their portfolios more flexibly based on their available capital. Even for high-priced stocks, investors can participate by purchasing a smaller number of shares.
1.2 Same-day round-trip trading system
The US stock market follows a T+0 trading system, which means investors can sell a stock on the same day they buy it. This system provides higher capital efficiency and greater trading flexibility, making it particularly suitable for strategies that need to respond quickly to market changes.
It is worth noting that although trading follows a T+0 model, cash and securities settlement still follows a T+1 cycle. In practice, this means that after selling a stock, the proceeds can usually be used immediately for further trading, but can only be withdrawn after settlement is completed on the next trading day.
For example, if an investor buys and sells a stock on Monday, the sale proceeds will be settled on Tuesday. Only after settlement is completed can the funds be withdrawn.
1.3 Minimum price movement
The minimum price movement, also known as the tick size, varies depending on the stock price:
- For stocks priced at $1 or above, the minimum tick size is $0.01
- For stocks priced below $1, the minimum tick size is $0.0001
This rule helps ensure appropriate pricing precision across different price ranges and supports more efficient price discovery in the market.
1.4 Stock ticker system
US stocks use a ticker symbol system made up of letters, usually 1 to 5 characters, representing an abbreviation of the company name. For example: AAPL for Apple, MSFT for Microsoft, TSLA for Tesla, and KO for Coca-Cola.
2. Price Limits and Circuit Breaker Mechanisms in the US Stock Market
2.1 Daily price movement rules
The US stock market does not impose a daily price limit. In theory, a US stock may rise or fall by more than 20% in a single trading day. While this gives investors greater upside potential, it also means they are exposed to higher price volatility.
Risk reminder: When investing in US stocks through MEXC's partner licensed broker, investors should carefully assess their own risk tolerance, allocate their portfolios prudently, and avoid excessive concentration in a single stock.
2.2 Three-tier market-wide circuit breaker system
To prevent excessive market volatility and panic selling, the US stock market has established a three-tier market-wide circuit breaker system based on the S&P 500 Index. The purpose of this mechanism is to provide a cooling-off period by pausing trading, allowing investors more time to assess risks rationally.
Level 1 circuit breaker: S&P 500 falls by 7%
- If triggered between 9:30 a.m. and 3:25 p.m. ET, trading across the market is paused for 15 minutes
- If triggered after 3:25 p.m. ET, trading continues with no halt
- Can only be triggered once per trading day
Level 2 circuit breaker: S&P 500 falls by 13%
- The trading halt rules are the same as Level 1
- Can only be triggered once per trading day
- Level 1 and Level 2 are counted independently within the same trading day
Level 3 circuit breaker: S&P 500 falls by 20%
- Trading across the market stops immediately, regardless of the time
- Trading remains halted until the next trading day
The circuit breaker mechanism is designed to:
- Give market participants time to cool down and reassess
- Prevent panic from spreading too quickly through the market
- Reduce the impact of irrational trading behavior
- Help preserve orderly liquidity and price discovery
2.3 Single-stock trading pauses (Limit Up-Limit Down, LULD)
In addition to market-wide circuit breakers, individual stocks may also be subject to trading pauses when they experience abnormal price swings. This is known as the Limit Up-Limit Down (LULD) mechanism. Its core purpose is to reduce extreme volatility by imposing a temporary pause in trading.
Length of trading pause after being triggered
- Standard pause: If a stock moves beyond the permitted price band within 5 minutes, trading will be automatically paused for 5 minutes
- In extreme cases: If the price does not return to the permitted range after 5 minutes, the pause may be extended depending on market conditions and liquidity
Volatility thresholds by stock type
The trigger threshold depends on the stock's liquidity tier and price range.
Stock Type | 5-Minute Price Movement Threshold |
Tier 1 Stocks (such as S&P 500 and Russell 1000 constituents) | 5% |
Tier 2 Stocks (other standard listed stocks) | 10% |
Lower-Priced Stocks (priced between $0.75 and $3) | 20% |
Very Low-Priced Stocks (priced below $0.75) | The lower of $0.15 or 75% |
Time-of-day differences
- At the open and close: Between 9:30 - 9:45 a.m. ET and 3:35 - 4:00 p.m. ET, thresholds are generally doubled because volatility tends to be higher during these periods
- Pre-market and after-hours trading: The LULD mechanism applies only during regular trading hours (9:30 a.m. - 4:00 p.m. ET) and does not apply to extended-hours trading
3. Tax Rules and Trading Restrictions in the US Stock Market
3.1 Dividend tax
Non-US investors should understand the tax rules related to US stock investing:
- Dividend withholding tax: Dividends received by non-US investors are generally subject to a 30% US federal withholding tax. For certain countries and regions, the rate may be reduced to 10% or 15% under an applicable tax treaty.
- Capital gains tax: Capital gains earned by non-US investors from buying and selling stocks are generally not subject to US federal tax.
Examples:
- Dividend example: If a stock pays a $100 dividend, the investor may receive about $70, while $30 is withheld as dividend tax.
- Capital gains example: If an investor buys a stock at $50 and sells it at $80, the $30 capital gain is generally not taxed by the US, although it may still need to be declared under the tax laws of the investor's country or region.
Note: Actual tax treatment may vary depending on the investor's country or region and any applicable tax treaty. Investors are advised to consult a professional tax advisor for accurate guidance.
3.2 Day trading restrictions
The US Securities and Exchange Commission (SEC) applies the Pattern Day Trader (PDT) Rule to margin accounts (but not cash accounts).
Trigger conditions:
- You make more than 3 day trades within 5 consecutive trading days
- And your total account equity is below $25,000
Restriction:
If both conditions are met, the account may be designated as a pattern day trader and become subject to trading restrictions, including limits on opening new day trades.
4. Frequently Asked Questions
4.1 Can I buy and sell US stocks on the same day?
Yes. The US stock market follows a T+0 trading system, which means stocks bought on the same day can also be sold on the same day. However, settlement follows a T+1 cycle, so proceeds from selling stocks are generally not available for withdrawal until the next trading day after settlement is completed.
4.2 Are there daily price limits in the US stock market?
No. The US stock market does not have a daily price limit. However, it does have a circuit breaker mechanism for risk control. If the S&P 500 Index falls by 7%, 13%, or 20% from the previous day's close, different levels of market-wide trading halts will be triggered.
4.3 What is the minimum number of shares I can buy in US stocks?
The minimum trading unit for US stocks is 1 share. This gives investors more flexibility and lowers the barrier to entry compared with some other stock markets.
4.4 Do I need to pay tax on US stock dividends?
Yes. Dividends received by non-US investors are generally subject to a 30% withholding tax, although the rate may be reduced to 10% or 15% under certain tax treaties. Capital gains from stock trading, however, are generally not taxed by the US. Investors should consult a professional tax advisor for specific tax guidance.
4.5 What is the US stock market circuit breaker mechanism?
The circuit breaker mechanism is a market protection measure that temporarily pauses trading during sharp market declines. Using the S&P 500 Index as the benchmark:
- A 7% drop triggers a Level 1 circuit breaker and a 15-minute halt
- A 13% drop triggers a Level 2 circuit breaker and another 15-minute halt
- A 20% drop triggers a Level 3 circuit breaker and stops trading for the rest of the day
The purpose of this mechanism is to provide a cooling-off period, reduce panic selling, and help maintain orderly market conditions.
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Disclaimer:
The information provided herein is for informational and educational purposes only and does not constitute financial, investment, tax, or legal advice. MEXC is not a registered investment advisor or broker-dealer. All investment strategies and investments involve risk of loss. Any content contained herein should not be relied upon as advice or construed as providing recommendations of any kind. Always conduct your own research and consult with a licensed financial professional before making any investment decisions.
By participating in these investment activities you risk losing ALL OR SUBSTANTIALLY ALL OF YOUR ASSETS. Please understand and evaluate the risk of trading and assess your risk tolerance carefully before conducting any trading or investment activities.