10 - 2014

Understanding Day Trading and Whether It Is Right for You

daytradingIf you are even vaguely familiar with investing, then you have most likely heard the term “day trading.” Of course, there’s a big difference between having heard a term and understanding what it actually means. Day trading is risky business, to be blunt, so you should consider all of the risks associated with it before engaging in it.

Day trading refers to intraday trading, meaning that most trades are conducted and positions closed within one trading session. Stock markets are open during business hours. The NYSE, for example, is open from 9:30AM to 4PM. A day trader usually attempts to buy and sell all of his stocks during that time.

Day traders often invest in higher risk stocks, such as penny stocks. Why? Such stocks are very volatile and price movements, even within the course of a single trading session, can be dramatic. There is a lot of potential profit in these stocks, but losses can rack up quickly, so keep that in mind.

Another way day traders increase profit potential is to use leverage, which essentially refers to borrowing from a broker or other institution to invest. A more familiar form of leveraging is a house mortgage and the concept is the same. You, the buyer, will put down a certain amount of money, another institution will offer you a margin, or borrowed money, and will then charge interest.

If stock prices go up, you get to keep the profits generated from the stocks bought with the borrowed money. Of course, if stock prices go down, you will still owe the lending institution the money you borrowed.

There are some notable weaknesses to day trading. For one, each time you buy and sell stocks, you have to pay a fee. If you plan to buy and hold onto a stock for ten years, these fees doesn’t really amount to much. If you conduct a dozen trades per day, however, the fees can add up very quickly. Also, day trading is a high risk and thus high stress activity. If you don’t enjoy living on the edge, day trading probably isn’t for you.

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