The idea of day trading sounds pretty simple. You buy stock and then sell it the same day for a higher price than you bought it. Just buy low and sell high. You can even work from your home computer and eventually make enough income to never have to work again. But what’s the catch?
First of all, your broker will charge commission fees for every single real time trade you make. A trading commission fee is usually around $10 per trade, but depending on the broker, can be slightly cheaper or more expensive. Say you start out trading with $2,000. For a roundtrip day trade (buying and selling a stock), your broker will charge you $20. That means your stock has to gain at least 1% intraday for the trade to become profitable. Good news might typically move a stock up 1-2%, but a 1% intraday move is relatively big and unlikely to repeat itself everyday. If you’re a high frequency trader, these commission fees will eat up your profit unless you have enough capital to offset the commission fees.
The next catch is the financial requirements to become a high frequency trader. In order to make more than seven roundtrip trades per week, the SEC requires that you have at least $20,000 cash in your account. You can still make day trades without having $20,000, but you will only be able to make seven of them in a week. Additionally, you will have to have a margin account, because the settlement for stock transactions is three days after the trade date. If you only have a cash account, you will only be able to trade once every four days. But a margin account will let you borrow cash from your broker to make more trades, while the proceeds from the previous trades get settled.
The most important factor to consider about day trading is your level of experience. You may have worked hard to save up thousands of dollars in cash to meet the requirements of day trading. But is day trading the smartest way to go about compounding your hard earned money? Statistically, most people lose money day trading before they learn the skills required to trade efficiently. The stock market is extremely competitive, and to make money, you have to beat the market. When you buy stock, hedge fund managers, mutual fund managers, and high frequency traders like yourself can move a stock’s price in a big way. You have to be able to analyze stocks and notice trends so you can get an edge over the other traders in the market.
And finally, stress is a huge factor. To day trade, you have to stare at your computer screen for long hours and watch as your money is victim to sudden market moves. You will have to be extremely focused, observant, and patient for market catalysts. A catalyst is any factor that can move a stock’s price. If your trade doesn’t perform the way you expected, you will have to quickly cut your losses, which can be very frustrating.
Some people are very successful at day trading, but it ‘s not for everyone. If you don’t meet the cash requirements or have the experience, then you are more likely to burn through your cash than make any money. Be prepared for the stress of high intensity focus and the possibility of quick losses. If you still think you want to day trade, try paper trading first, and see how successful your hypothetical trades are. Many sites offer free stock market simulators, where you can make trades with virtual cash. That way, you can practice without putting any money up front.