What is Day Trading Stocks?
Day trading is defined as the buying and selling of an asset within a single trading day. The objective of a day trader is to make money buying low and selling higher within the day. Day traders use technical (charts) and fundamental (Industry, financial data, management analysis, business data, etc.) analysis to help them determine the best time to buy and sell. Some day traders will use leverage (borrowing money through a brokerage firm) to increase their potential returns from day trading through a margin account.
Stocks represent ownership of a company. Individuals can purchase stocks of a company representing how much of the company they own. These stocks are bought and sold on an electronic exchange (i.e. NYSE, Nasdaq) facilitated typically through a stock brokerage firm (i.e. TD Ameritrade, E-trade).
The buying and selling of stocks between individuals on a stock exchange, like NYSE or the Nasdaq, is called trading. There are many reasons why individuals or corporations would like to buy or sell their ownership of stocks. Someone looking to buy stocks might believe that a companies value will grow and so will the value of the stock. Someone looking to sell a stock might believe the company's value is going to decline or they need to sell because they need access to funds. Regardless of the reasoning, this interaction between buyers and sellers gives an opportunity for day trading.
How Does it Work?
How Do You Make Money?
Stock day traders make money by buying and selling shares of a company, making a profit from the difference in the buy and sell price. They hold their positions (long or short - see below) for a short period of time from seconds to hours within the day.
There are several ways for traders to make money:
Long positions are what most people are familiar with. It's a term that means you're buying an asset (stocks) assuming that the price will go up. If it does go up, you sell making a profit on the difference between your buy (purchase) price and sale price. For example, if you buy 100 Tesla stock for $250 (100 x $250 = $25,000) and after two hours the price shoots up to $300 and you sell, you'd profit $5,000 (100 x $300 = $30,000 - $25,000 = $5,000). Fairly straight forward.
Short positions can be more confusing than long positions. This is when you believe that an asset will fall in price. In these situations, you can still make money if the price falls. You do this through a short position.
There are several options to short an asset. Typically, it's done through a margin account through a brokerage firm that allows for margin trading. To short, you're borrowing the asset you believe will decrease in price and selling it right away. Then you buy it back, hopefully at a lower price. You make the difference between the purchase price and the selling price.
For example, you borrow 100 shares of Tesla at a price of $250 and sell it immediately. You now have $25,000. Tesla shares fall to the price of $200 after several days. You would now buy 100 shares of Tesla at $200 and return it to the brokerage account. You make the difference of $5,000 dollars ($25,000 - $20,000 (100 x $200) = $5,000).
We briefly touched on margin trading. Margin trading allows you to borrow money from a brokerage firm to magnify your trades. You can use leverage for long or short positions. Margin trading is typically reserved for more experienced traders because your risk and reward increases greatly.
For example, if you only had $10,000 in your trading account, you can margin trade at 50% allowing you to borrow $5,000 to buy a total worth of $15,000 in stocks. If the price of the asset you purchased doubled in value, you would have $30,000 and would pay back the $5,000 plus some small fees and keep the rest.
What Are The Pros & Cons?
- You can work from practically anywhere with a computer and fast reliable internet.
- You can work when you want within trading hours.
- You'll learn to be a better long term investor.
- You'll learn a lot about financial markets.
- You have the potential to earn a lot.
- Need to start with a minimum of $25,000 in your trading account.
- It can be risky and sometimes stressful.
- Relatively steep learning curve.
- Most traders lose money while learning.
Estimated Startup Cost
Key Activities Day Trading Stocks
Day traders tend to spend most of their time using technical analysis to find trade opportunities. They'll study charts for patterns, use technical indicators, look at historical data, and other techniques used by technical analysts. At other times, traders are studying financials markets by watching relevant financial news, reading from financial papers, websites, and listening analyst opinions about the market. While they aren't actively trading, they spend most of their time reviewing their trading strategies and learning new skills that will make them a more efficient and successful trader.
Start Day Trading Stocks
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Michelle Schroeder-Gardner runs the award-winning personal finance blog, Making Sense of Cents. She started blogging entirely as a hobby, and now currently earns over $100,000 a month blogging, with around $50,000 a month of that coming from affiliate marketing.
Her writing and advice have been featured on sites such as Huffington Post, Forbes, Yahoo, Cosmopolitan Magazine, Zillow, US News, Nasdaq, MSN, and more. When she's not blogging, you'll find her exploring via sailboat (we used to RV full-time!) with her husband and our two dogs. They sold their house in 2015 and have been traveling full-time since!
Module 1 - Getting Started
Module 2 - Building Your Website
Module 3 - Getting Your First Client
Module 4 - Optimizing Your Program
Module 5 - Group Coaching
Module 6 - Scale
Module 7 - Online Business
Module 8 - Congratulations
By Michelle Schroeder-Gardner