Day trading is not for the faint of heart. Most beginner investors are better suited for longer-term positions, such as mutual funds, exchange-traded funds, and investing in stocks and bonds. Investors who are successful with their long-term investments, or those who have the cash to play with, can begin to seriously think about day trading. It does not come without a high amount of risk. Day trading involves moving large amounts of money in and out of positions on a daily basis, rather than waiting for returns over a longer period of time.
In this article, we’ll take a look at day trading, what it is, and if you should consider it when investing money in the stock market.
What Is Day Trading?
Unlike longer-term investments, day trading involves buying and selling shares of stock multiple times per day. Instead of holding stock for weeks, months, or years, day traders look at the short-term price movement. This is accomplished by looking at short-term price charts instead of the daily price charts that longer-term investors tend to rely on. Short-term price charts can focus on price movement by increments of one minute, five minutes, 20 minutes, and so on.
Day traders buy and sell shares based on the movement of these short-term price charts, picking the best time to enter and exit a position dependent on a variety of factors. Selling is always done before the close of the market, as the price may move during after-hours trading.
Traders can invest their own money in day trading or use margin accounts to fund their positions. When using a margin account, interest is only charged if positions are left open overnight, making it even more practical to ensure positions are closed before the end of the market’s business day.
Day trading reduces the need to be an expert on the company you invest in, but traders still need to be aware of certain factors. These factors include scheduled earnings dates for the company and its competitors, company news or announcements such as product releases, and other important dates in the industry in which you are investing, like conferences or events.
Is Day Trading Worth the Risk?
There’s no doubt that day trading comes with risk. Stock prices fluctuate throughout the day, and while there are traders who say they’ve mastered the art, for the average beginning investor, the risk is just too high.
To even begin to realize a profit in day trading, you need a large amount of money from the start. Factor in the trading costs each time you buy or sell shares, and the tax repercussions whenever you turn a profit, and it’s easy to see how longer-term investments make more sense for those without the experience.
Stock investing works better when you have a diverse portfolio. Not every investment you make works out, and you have to be prepared to make up for your losses. You can limit your risk by investing your money in multiple positions over a longer period of time. Positions that perform well will counteract the losers, helping you limit your losses while still providing the opportunity to turn a profit. Longer-term investments also incur lower transaction fees since you’re not buying and selling multiple times per day.
Day Trading Requirements
If you don’t have the money to lose, you shouldn’t even begin to think about day trading. In addition, FINRA has set a minimum requirement of $25,000 that individuals must have in their margin accounts any day they will be participating in day trading activities. Fall below that amount, and you won’t be permitted to day trade.
Stock investing of any kind is a risk, and you need to be willing to put your money on the line before making any kind of investment, including day trading. While there have been success stories, your best bet is to set up a diverse portfolio and manage your investments over the long term.
Brian Flax is a freelance writer based outside of the Washington, D.C., area. He is experienced in a variety of topics, including time tracking software, finance, and technology. Brian holds a master’s degree in education technology and a bachelor’s in entertainment business.