Add Partners to Your Day Trading Business - dummies

Add Partners to Your Day Trading Business

Once your day trading proves to be wildly successful, you may want to take on partners to give you more trading capital and a slightly more regular income from the management fees. You can take on partners, but it’s a lot of work, and once again, you must follow certain rules and procedures.

If you’re trading options and futures and are operating a commodity pool or working as a commodity trading advisor, you need to register with the National Futures Association. If you’re trading stocks and bonds, you have to register with the Securities and Exchange Commission unless you meet the exemption tests that let you operate as a hedge fund instead.

Registration is not a do-it-yourself project. For that matter, neither is ensuring that you are exempt from registration even though you have partners. An error or omission may have tremendous repercussions down the line, including fines or jail time. If you want to take on partners for your trading business, spend the money for qualified legal advice. Doing so protects you and shows prospective customers that you’re serious about your business.

To qualify as a hedge fund, which is a private investment partnership that does not qualify for registration under the Investment Company Act of 1940, you have to deal only with accredited investors (those with at least $1 million in net worth or an annual income of $200,000) or qualified purchasers (those with $5 million in investable assets).

The idea is that these people understand the risks they’re taking and have enough money to lose. Hedge funds do not have to register with the SEC, but they may have to register with the NFA.

Whether or not you need to register, prospective investors will want to see proof that you know what you’re doing and know how to handle their money. That step is beyond the scope of this book, but it’s something for a successful day trader to consider.