Day Trading

Written by Jacey Harmon
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Day trading is the buying and selling of securities in the same day. The goal of each intraday trade is to pocket small amounts on each trade, often a few pennies or a nickel. A trader can often buy and sell the same security as many as ten times a day or as little as two times a day, depending on his or her strategy. As with any investment strategy there are risks and rewards if you qualify for a day trading account.

Day trading requires a lot of work, more than one would expect. Often day traders try to find "story stocks" or a stock with a news item creating excess activity. Earnings announcements, mergers and acquisitions, and new products can all drive a stock up or down in a hurry. Day traders work hard at finding these stocks and try to profit on the activity. There are some services available that do most of the research for day traders, for a fee of course. Even with the help of a paid service there is still plenty of work for a day trader.

The rapid fire buying and selling of securities can lead to very large commission charges. If you utilize a discount broker at say ten dollars per trade your commissions can range between 20 to 100 dollars every day. If you trade 100 in commissions every day that can total 25,000 dollars spent on commissions alone. Of course, your profits should be larger than your commissions. Day traders, however, don't win on every trade but you always pay a commission. One of the benefits to day trading is the lack of overnight exposure, hence reducing your risk on a position.

Requirements for Day Traders

The National Association of Securities Dealers (NASD) requires detailed information for those who want to open a day trading account. The NASD considers anybody who trades four or more day trades in a five business day period as a day trader. Each buy and sell in the same day is considered a day trade.

Brokers are required to give a client disclosure documents that states the risks involved with day trading. After making sure the client has received the proper disclosure documents the broker is then required to perform reasonable diligence to gain the facts of why a client wants to day trade. Information often requested by brokers includes, investment objectives, experience, income, net worth, tax and employment status, age and number of dependents. Opening a day trading account sounds worse than it is, but the risks involved with day trading deserve a little precaution.


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