What Is Day Trading in the Stock Market?
Internet ads tout how much profit you can earn as a day trader, while government agencies warn against the risks of active day trading. Day trading in the stock market offers both opportunities: big profits and the chance to go broke. Learning about day trading and the requirements to be a day trader are the first steps to see if day trading will work for you.
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Day Trading Defined
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A stock market day trader buys -- or sells short -- shares of stock and holds the positions for a few minutes to a few hours. For a day trader, all stock market positions are closed out by the end of the stock market day, and the trader's account is 100 percent cash. Day trading involves making profits on small moves in stock prices. A day trader may buy 1,000 shares of a stock to profit from a 10 or 20 cent price change, earning $100 or $200 on the trade. Day trading is a fast way to make profits in the stock market.
Stock Day Trading Rules
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Financial Industry Regulatory Authority (FINRA) rules state a brokerage account in which day trades are placed more than four times in any five-day period will be designated a "pattern day trading account." Pattern day trading accounts are margin accounts with different equity and leverage rules than regular margin accounts. A pattern day trading account must maintain at least $25,000 in trader equity compared to $2,000 for a regular margin account. The pattern day trading account is allowed up to four times the leverage of trader equity during day trading versus two times leverage allowed in standard margin accounts. The leverage means a day trader with $50,000 cash in the account to start the trading day can hold up to $200,000 worth of stocks at one time while trading. Stock market day trading must be done in an account designated as a pattern day trading account.
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Day Trading Tools
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Stock market day traders use technical analysis price and charting tools to look for price trends in individual stocks to buy and sell for quick profits. A day trader also uses advanced price information, showing where bid and ask prices are in the market to determine which way supply and demand will push a stock price. A low commission rate brokerage account from a broker who offers advanced trading tools helps a day trader get the most profit from every trade.
Day Trading Warnings
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The Securities and Exchange Commission website has a page titled "Day Trading: Your Dollars at Risk." The SEC wants potential day traders to know that day trading is a full-time, stressful occupation where many new traders never reach the point of becoming successful, profitable day traders. The SEC also warns that websites and individuals offering day trading seminars, training and tips may have other motives besides helping new traders become successful traders.
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References
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