Day Trading

Day trading has been around for a long time, but it really came into the forefront during the internet and tech boom of the last 90's and into 2000. The concept of day trading is simple - you keep an eye on active, volatile stocks, and then attempt to buy in on dips and sell again when the stock bounces up a bit. Many stocks move around several percentage points during any given trading day - being down 1% in the morning and ending up 2% up in the afternoon. If you played it just right, you could get a 3% return on your money in 1 day (hmmm, 3% times 250 trading days per year = 750% annual return!). Of course, if you make the wrong bets, you can just as easily lose that same 3% in a day (hmmm, lets see, 3% loss per day, all money gone in 30 days!).

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It is called "day trading" because traders will often buy in and out of stocks several times in a day, trying to make a little gain on each or quickly closing a position if it posts a loss. Most day traders keep 100% in cash overnight, not wanting to risk remaining invested in any securities after the market closes when good news or bad news can greatly affect the opening price of the stock the next morning. Many days traders lost a lot of money when the market tanked - it is easy to pick winners in a rapidly increasing market, in fact just about anything you pick will likely go up. However, picking winning stocks in a flat or down market can be quite a challenge. So day trading is not for the faint of heart. There are a number of sites aimed at day traders, selling daily stock reports and such.

Many day traders also use expensive software tools for tracking a large number of stocks, looking for patterns, and executing a large number of trades with real time price quotes (since many trades are based upon that key penny or two in price that makes the trade profitable). Given the volatility of the stock market though, you rarely find anyone offering a proven long-term track record in day trading. How risky is day trading? Here's a quote from the SEC's website: "Day traders rapidly buy and sell stocks throughout the day in the hope that their stocks will continue climbing or falling in value for the seconds to minutes they own the stock, allowing them to lock in quick profits. Day trading is extremely risky and can result in substantial financial losses in a very short period of time. If you are a day trader, or are thinking about day trading, read our publication, Day Trading: Your Dollars at Risk. We also have warnings and tips about online trading and day trading."

Dangers of Day Trading

According to the SEC, day traders should know:

• they face severe financial losses
• they are not "investing" but rather guessing which way stocks will move
• day trading is a stressful and expensive job
• depending on borrowed money (margin) leverages both your upside AND downside
• beware of claims of easy profit from newsletters and websites
• watch out for hot tips - many others attempt to "pump" a stock, getting others to buy it and then selling as it rises

You'll find a lot of sites selling Day Trading tips, Day Trading software, Day Trading seminars, Day Trading newsletters, and so on. You're always better off getting personal recommendations from friends or colleagues than falling for a sales pitch by someone whose goal it to get your money. So take everything you read or hear with a grain of salt. Day Trading is not easy, and is not a guaranteed way to make money. If you think Day Trading is for you, take a "dry run" first - give yourself $100K in pretend money, do a few weeks of "pretend" investing and see what kind of returns you would make. If you find you have a knack at it (or is it luck?), start off with a small amount - money that you can afford to lose - and see how it goes. Remember though that nothing beats investing long term in profitable, leading companies. I'd rather let my money ride on Microsoft for 20 years and not think about it too much instead of buying in and out of 30 stocks every day, hoping to consistently pick winners day after day, year after year.

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