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.
Day Trading: Your
Dollars at Risk
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 traders usually buy on borrowed money, hoping
that they will reap higher profits through leverage, but running the
risk of higher losses too.
While day trading is neither illegal nor is it unethical, it can be
highly risky. Most individual investors do not have the wealth, the
time, or the temperament to make money and to sustain the
devastating losses that day trading can bring.
Here are some of the facts that every investor should know about
day trading:
Be prepared to suffer
severe financial losses
Day traders typically suffer severe financial losses in their first
months of trading, and many never graduate to profit-making status.
Given these outcomes, it's clear: day traders should only risk money
they can afford to lose. They should never use money they will need
for daily living expenses, retirement, take out a second mortgage,
or use their student loan money for day trading.
Day traders do not "invest"
Day traders sit in front of computer screens and look for a stock
that is either moving up or down in value. They want to ride the
momentum of the stock and get out of the stock before it changes
course. They do not know for certain how the stock will move, they
are hoping that it will move in one direction, either up or down in
value. True day traders do not own any stocks overnight because of
the extreme risk that prices will change radically from one day to
the next, leading to large losses.
Day trading is an extremely stressful and expensive full-time job.
Day traders must watch the market continuously during the day at
their computer terminals. It's extremely difficult and demands great
concentration to watch dozens of ticker quotes and price
fluctuations to spot market trends. Day traders also have high
expenses, paying their firms large amounts in commissions, for
training, and for computers. Any day trader should know up front how
much they need to make to cover expenses and break even.
Day traders depend heavily on borrowing money or buying stocks on
margin.
Borrowing money to trade
in stocks is always a risky business. Day trading strategies demand
using the leverage of borrowed money to make profits. This is why
many day traders lose all their money and may end up in debt as
well. Day traders should understand how margin works, how much time
they'll have to meet a margin call, and the potential for getting in
over their heads.
Source: US Securities and Exchange Commission
