When it comes to investing, there are certain SEC rules you have to follow, but other than those regulations, there aren’t necessarily any hard-and-fast rules. The three-day rule is one guideline that isn’t a requirement but could save you unnecessary losses.
Investors often follow certain rules of thumb, or basic guidelines, that most experts agree are beneficial. The three-day rule for stocks is one example. According to the rule, investors should wait three days before buying shares whose price has dropped significantly.
Why waiting three days may be useful
Investors can often be rattled by news impacting the financial markets and, typically, reacting too quickly to news can cause more damage than waiting. It can take at least 72 hours for a situation to settle down, and by then you'll likely have more information about a particular stock than if you jumped to buy it immediately upon news of a price drop.
Benzinga recommends that when a stock drops by “high single digits or more in terms of percent change,” investors give themselves three days before buying that stock. "By waiting 3 days to buy into a position, you can grow your profits and lessen your losses," Benzinga writes.
One reason for implementing the three-day waiting period on stocks is that the price may drop even lower in that time. If that’s the case, investors who are patient may be able to scoop up shares at an even lower price, locking in better returns (if the stock’s price eventually increases, of course).
Another reason to give yourself three days before buying is that you can use that time to conduct research on the stock and why its value has dropped. You'll want to know the cause, and not just assume that the company is strong—it may be about to go under.
During the three-day waiting period, look into the company's fundamentals. Find recent news that may have impacted its value, research its earnings reports and projections for key metrics such as EBITDA, and look into how competitors are doing. Also, if you're considering buying a stock that’s decreased significantly in price, remember that the price could eventually sink even lower.
What's the SEC three-day settlement rule?
The term “three-day rule” may also bring to mind the SEC’s rule about the settlement of stock trades (how much time is needed for transferring securities from the seller to the buyer).
According to the SEC, trades executed on the stock market must be settled within a specific time. Prior to 1993, it was five days, partly due to the lag when using the postal system. In 1993, the SEC shortened this to three days (T+3), meaning that if you sold shares on a Tuesday, the sale would settle on Friday.
In March 2017, the SEC again shortened this rule to T+2, meaning that trades must be settled within two business days. Since many trades are conducted digitally, less time is needed for the transactions to be completed.