Risks for Day Traders
Day trading -- the practice of buying and selling stock or another investment on the same day -- has been considered risky business. Day trading can have dramatic consequences, good or bad. It lures people with a get-rich-quick mentality but can result in major losses. Still, newcomers are attracted to potential profits. A day trader could encounter myriad pitfalls, but here are a few possibilities.
Other People Are Reading
-
Announcements: Company or Government
-
Any moment during the trading day, a formal announcement can dramatically change the market's view of a stock. Day traders assume they can move quickly -- or have preventive measures in place -- to bail out and cut their losses. A stock's market may become flooded with sellers, making it more difficult to fill a sell order or cause the price to go down. In addition to company-sourced events, the U.S. Securities and Exchange Commission or the FBI could raid a corporation's offices or mention an inquiry into the company. News events or announcements from other companies -- especially suppliers and competitors -- can affect a stock. A chipmaker's factory outage could affect the stock of a smart-phone maker that uses that chip.
Catastrophic or World Events
-
A catastrophe can drastically affect a stock or the overall markets. The 9/11 terrorist attacks on the World Trade Center temporarily shut down the New York Stock Exchange. Markets can change quickly when trouble surfaces in foreign countries, which may change oil prices or destabilize a currency. World economies are extremely interlinked. A rebellious outbreak, an earthquake or some other large-scale event can cause uncertainty for that region and the countries that depend on it. In addition to actual catastrophes, governments do things that can wreak havoc on the markets, such as shutting down the export of a certain item or threatening another nation.
-
Market Technological Effects
-
Technology has enabled stock trades to move extremely fast, potentially increasing the chance of a chain reaction. Of note is the "flash crash" on May 6, 2010, which was reportedly triggered by a large-volume trader initiating an automated sell-execution program for a huge amount of E-mini futures contracts -- an instrument based on an index, such as the S&P 500. The program reportedly did not consider the selling price, which may have contributed to the whole thing spiraling downward. Since this incident, the SEC has increased interest in automated trading and what safety measures should be in place to avoid these situations.
Margin Calls
-
Because day traders often seek a stock's relatively small moves to profit, they often trade fairly large positions. For many traders, this means borrowing some money for the transactions using the brokerage's loan methodology called "margin." Margin is a loan against your stock positions. A brokerage will loan a certain percentage of the stocks' value in your account. If your stocks drop in value, you could receive a "margin call," where the brokerage demands deposits to bring the account ratios back in line. Brokerages also charge interest for the margin-loan amount.
-
References
- Photo Credit Jupiterimages/Photos.com/Getty Images
