What Is Day Trading? (2024)

Maybe you’ve been talking to a buddy of yours at the gym who’s gotten into a type of investing called day trading. Maybe you’ve got some extra cash and you’re thinking about testing the waters yourself—what could it really hurt?

Wellalmost every single person we’ve talked to who has gotten into day trading has the same story—and the same tragic ending.

At first, they’re all excited. They’re convinced they can quit their day job and make a fortune buying and selling stocks every single day . . . it seems so easy! But then a few months later, they’re stunned when the losses start piling up and they look up and realize they’ve lost all the money they put into it.

Whenever wehear a story like that, Proverbs 28:20 (NKJV) comes to mind, which says, “he who hastens to be rich will not go unpunished.” Let usbe the first to tell you day trading will leave you feeling punished.

Let’s take a closer look at what day trading is, how it works and why you need to stay far, far away from getting caught in that trap!

What Is Day Trading?

Day trading is the act of buying and selling stocks within a very short window of time—we’re talking minutes or hours—with the goal of making a bunch of very small profits that will hopefully add up to big gains over time. A day trader might buy a stock at 9:15 a.m., turn around and sell it at 2:37 p.m. that same day, and then do it all over again with another stock.

The steady rise of online stockbrokers and “do-it-yourself” investing apps makes it very easy for anyone with a smartphone or an internet connection to dabble in day trading . . . but just because it’s easy doesn’t mean it’s smart.

Don’t believe us? Studies have shown that more than 97% of day traders lose money over time, and less than 1% of day traders are actually profitable.1,2 One percent! But of course, nobody thinks they will be the one losing out. It’s like playing a high-stakes poker game: You might win a hand or two here and there, but chances are you’ll leave the table broke and disappointed.

How Does Day Trading Work?

Day traders are not really what you would call “long-term” thinkers. Every day, they’re glued to their computer screens and televisions in order to stay up to date on the news and any trends that might give them hints about which direction a company’s stock will move that day.

Many day traders will buy and sell stocks based on current events—anything from quarterly profit statements to product launches or major announcements. They’re focused on what’s happening right now. Other traders might use sophisticated algorithms or analyze charts to try to figure out when might be the best time to buy or sell.

A day trader tries to make money one of two ways. If a day trader sees that a stock is moving higher or thinks that it might go higher that day, they’ll buy the stock and then sell it once its value goes up. But if the stock’s value drops, then they’ll lose money when they sell it. Pretty straightforward!

On the other hand, if a day trader senses that a stock might take a nosedive that day, they might try to “short sell” it. That’s just a fancy term for betting against the stock. When someone short sells a stock, they profit when the price of a stock goes down.

Market chaos, inflation, your future—work with a pro to navigate this stuff.

With either strategy, day traders are hoping that those stocks will move in the direction they expected them to. They’re not afraid of the stock market’s volatility in the short term. Instead, they want to take advantage of it.

It’s also important to note that many day traders actually borrow money and go into debt to make their trades—they call this “buying on margin” or using “leverage” to buy more stock than they can afford. Wecall it playing with fire, and it’s a good way to get burned. Not only could you lose all the money you’ve invested, you could end up buried under a pile of debt too. Never, under any circumstances, borrow money to invest.

Here’s Why Day Trading Is a Bad Idea

1. Day trading is extremely risky.

While most investors might shy away from relying solely on stocks that bounce up and down like a pinball in a pinball machine, day traders love these types of stocks because they might be able to make a quick buck off them.

The problem is, it’s almost impossible to predict which direction these stocks will move throughout the day . . . and one wrong guess could lead to hundreds or even thousands of dollars lost on a single bad trade.

And day traders typically end up on the wrong side of a trade more often than not. A study found that traders who lose money account for anywhere between 72–80% of all day trades being made.3 It’s just not worth the risk!

2. Day trading is very expensive.

If you’re a pattern day trader—anyone who makes four or more “day trades” (that’s when you buy and sell a stock on the same day) within five business days—you have to follow certain rules set by the Financial Industry Regulatory Authority (FINRA).

That means you must have at least $25,000 in the brokerage account you trade with in order to keep day trading—that’s not exactly chump change!4 If your balance falls below that, you will need to deposit more cash into the account before you can continue trading.

Day trading also typically comes with costly commissions and transaction fees that will eat into any earnings you might wind up getting, so your profits need to be high enough to cover those costs. Oh, and your earnings from day trading will also be subject to short-term capital gains taxes, which is the same rate as your income tax rate.5

3. Day trading comes with a high level of pressure and stress.

There’s a reason why more than 75% of day traders quit within the first two years of trading.6 Investing in the stock market already feels like a roller coaster with all the ups and downs. Day trading amplifies that feeling to an extreme level. It’s more like being on one of those drop tower rides at an amusement park that jerks you up and down over and over again—and you can’t get off.

The emotional and psychological toll of day trading has left behind a trail of long-lasting health issues (both mental and physical), broken marriages and even suicide. Day trading isn’t just dumb—it’s also dangerous.

A Better Way to Invest

Listen to us, when you are day trading, you’re not investing—you’re gambling with your money. It’s reckless, risky and extremely unpredictable. And it’s simply not worth your time.

Day trading is basically a get-rich-quick scheme—plain and simple. Some seminar speaker or YouTuber living in his mother’s basement will try to convince you that day trading is a shortcut to making a fortune. But what they won’t tell you is that there’s a difference between getting rich and building wealth. Building wealth is a marathon, not a sprint—there are no shortcuts!

The best way to invest for the long haul is to exercise a “buy-and-hold” investment strategy. That means you’rebuyingshares of an investment and thenholdingon to those shares for a long time. Investors with a buy-and-hold mindset don’t panic or make decisions based out of fear or greed—they know that the stock market always trends up over time, so they know patience and discipline are the keys to successful investing.

So, what should you invest in? Werecommend investing 15% of your gross income in good growth stock mutual funds inside of tax-advantaged accounts like your 401(k) and Roth IRA. Since mutual funds are made up of stocks from many different companies, they give you a level of diversification that single stocks don’t.

There’s a reason why most of the millionaires we talked to for our National Study of Millionaires said their 401(k) was the key to their financial success and not a single one of them said single stocks played a big role in their net worth.

Work With an Investment Pro

Here’s the deal: Investing is too important to do with an app. In fact, 68% ofmillionaires used a financial advisor or investment professional to help them invest and build their wealth!

Our SmartVestor program will connect you with up to five investment pros in your area who can help you get started with investing and walk you through all of your options so that you can make the best choices for your future.

Ready to get started? Find your SmartVestor Pro today!

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What Is Day Trading? (2024)

FAQs

How does day trading work? ›

Day trading involves actively buying and selling securities within the same day, trying to capitalize on short-term changes in price. Those involved in day trading often borrow or leverage capital each day in order to purchase additional assets−but it also substantially increases your risk.

Why do you need $25,000 to day trade? ›

Ultimately, the purpose of the $25,000 minimum equity requirement is to ensure that day traders have enough capital to cover their potential losses and to prevent market manipulation. It also protects brokers from financial risks and helps maintain the stability of the trading industry.

What is an example of day trading? ›

Here's an example: A day trader identifies a pattern in a stock's price and buys 1,000 shares for $20 each. A few minutes later, the stock price moves up to $20.10 per share, and they sell. They profit $0.10 per share, or $100 on the trade.

What is the catch to day trading? ›

Day trading is a high-risk, high-reward strategy. If your decisions don't work out, you can lose money much more quickly than a regular investor, especially if you use leverage. A study of 1,600 day traders over the course of two years found that 97% of individuals who day traded for more than 300 days lost money.

How do I become a day trader with $100? ›

How to Start Day Trading
  1. Step 1: Find a Brokerage. If you want to trade successfully with only $100, your broker needs to meet some requirements from your side. ...
  2. Step 2: Choose Securities. ...
  3. Step 3: Determine Strategy. ...
  4. Step 4: Start Trading.
Feb 14, 2024

Can I day trade with 100 dollars? ›

Can You Start Trading With $100? Yes, you can technically start trading with $100 but it depends on what you are trying to trade and the strategy you are employing. Depending on that, brokerages may ask for a minimum deposit in your account that could be higher than $100.

What is the 3-5-7 rule in trading? ›

The 3–5–7 rule in trading is a risk management principle that suggests allocating a certain percentage of your trading capital to different trades based on their risk levels. Here's how it typically works: 3% Rule: This suggests risking no more than 3% of your trading capital on any single trade.

How many day trades are you allowed? ›

A day trade is when you purchase or short a security and then sell or cover the same security in the same day. Essentially, if you have a $5,000 account, you can only make three-day trades in any rolling five-day period. Once your account value is above $25,000, the restriction no longer applies to you.

Who is the richest trader in the world? ›

George Soros

This feat cemented his reputation as the "man who broke the Bank of England" and solidified his status as a forex trading legend. Soros' net worth is estimated to be around $8 billion, making him one of the wealthiest individuals in the world.

Do day traders pay taxes? ›

How day trading impacts your taxes. A profitable trader must pay taxes on their earnings, further reducing any potential profit. Additionally, day trading doesn't qualify for favorable tax treatment compared with long-term buy-and-hold investing.

How many hours do day traders work? ›

Most independent day traders have short days, working two to five hours per day. Often they will practice making simulated trades for several months before beginning to make live trades. They track their successes and failures versus the market, aiming to learn by experience.

How should a beginner start trading? ›

Here is a day trading guide for beginners
  1. Learn the basics of the stock market.
  2. Choose a broker.
  3. Set up a demo account.
  4. Develop a trading strategy.
  5. Start small.
  6. Be patient.
  7. Manage your risk.
  8. Take breaks.

Is day trading gambling? ›

Day trading is often compared to gambling due to the similarities in risk and uncertainty involved. Both activities involve making speculative bets on the outcome of certain events, whether it's the movement of stock market prices or the roll of a dice.

Which trading is best for beginners? ›

Overview: Swing trading is an excellent starting point for beginners. It strikes a balance between the fast-paced day trading and long-term investing.

Is day trading actually profitable? ›

Can you make money day trading? Most of the time, day trading is not profitable, but it can be profitable. Investors sometimes succeed at predicting a stock's movements and raking in six-figure profits by accurately timing the market.

How much money do day traders with $10,000 accounts make per day on average? ›

With a $10,000 account, a good day might bring in a five percent gain, which is $500. However, day traders also need to consider fixed costs such as commissions charged by brokers. These commissions can eat into profits, and day traders need to earn enough to overcome these fees [2].

Is day trading really worth it? ›

The Bottom Line

Day trading is risky, time-consuming, stressful, and the odds are against you. It's not worth pursuing for most stock investors, and if you're looking to invest in stocks, there are much better (and less risky) ways to do it.

Can I day trade with 500 dollars? ›

Can you start day trading in the US with $500? Yes, there are many trading platforms that allow customers to begin trading with low sums. For example, brokers like eToro and Robinhood allow customers to initiate trades from as low as $10.

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