An accredited investor is an individual or organization that can deal in unregistered securities or investment products by satisfying one or more criteria that qualify it for exemption from the regulations intended to protect less sophisticated investors.
There are five qualifying criteria of an accredited investor. They are net worth, income, professional experience, governance status and asset size.
Purpose of the Accredited Investor Designation
Most individuals and organizations know little about the markets, securities and financial regulations. This means that they rely on other individuals, who are nominally financial professionals, to offer them advice and guidance when investing in the market.
This creates a situation where many individuals and organizations are considered vulnerable to making investment decisions that are not in their best interest based on a poor understanding of the markets or from malicious or negligent investment advice.
Securities regulators require that securities and investment products meant for the average investor be simple enough and have disclosure rules that make them accessible to the average investor.
However, these requirements can limit the ability of organizations to create and distribute securities and investment products that meet the needs of more sophisticated investors.
Therefore, securities regulators have created an exempt class of investors that can partake in more complex and sophisticated securities and investment products, as long as they meet certain qualifying criteria.
Trading and Accredited Investors
Day traders who wish to become accredited investors must meet one or more of the 5 qualifying criteria.
Generally a day trader who is ready to become a qualified investor will already meet one or more of the 5 qualifying criteria by the time their professional development takes them to a point where they want to deal in more complex and sophisticated securities and investment products.
While it can be frustrating to be limited as a new day trader who has spent the time and effort to learn about complex and sophisticated markets, the qualifying requirements for trading in them are generally appropriate and represent a fair gauge of when a day trader is genuinely prepared to trade in these securities or investment products.
That said, the markets that accredited investors have access to can be extremely lucrative, as these securities and investment products allow day traders to create very complex and nuanced trading strategies and positions, which can magnify profits and allow profitable trades in situations that would be impossible with simpler and less sophisticated securities and investment products.
Day traders should respect the guidelines for becoming an accredited investor, and consider them to be a developmental goal instead of an unfair limitation.
Final Thoughts
Becoming an accredited investor is a worthy goal for any day trader’s career path, as it means qualifying for appropriate criteria that signify professional success as a day trader.
Day traders who are accredited investors have access to a range of securities and investment products that allow them to exercise their greater knowledge and experience by creating trading strategies and positions that would be impossible with simpler and less sophisticated securities and investment products.