Day trading most commonly refers to the practice of buying and selling stocks during the same day, so that at the end of the day you don’t hold any shares overnight; you sell as many shares as you buy. You make money on the difference between the purchase and sales prices.
The main motivation for this style of trading is to make money every day so you don’t sit on the shares, plus of course you eliminate the risk that the shares go down in value overnight. You also reduce the risk of holding a position overnight where the open price may have significantly changed from the previous day’s closing price.
When Day Trading Was The Buzz
NASDAQ originally defined day trading by claiming an investor is a day trader if he makes more than four buy and sell orders over a five-day period.
Prior to the year 2000, it was not uncommon for some of the most successful day traders to make more than a million dollars in a single day.
There were dozens of day trading chat rooms, where people were “told” what to buy and when to buy it.
Some of these chat-rooms had more than 500 members.
Most day traders, as high as 99%, lost their shirt.
One of the reasons they lost is because they could trade on Margin.
Trading on Margin means that the brokerage firm which executes your trades will lend you up to 5 times your investment.
So if you had $10,000 in your trading account, you could in some cases trade with $50,000. However, if you lost on your trades, repayment was due immediately. Since the heady dot com days of 2000, day trading has gone out of style and out of range. Most brokerage firms have gone under or have consolidated, and staff has been reduced in the remaining firms by about 80%.
Trades that used to cost $35 to execute can now be had for as low as $4.
Initially, this happened because President Bush predicted the economy would decline, and Mr Greenspan kept on raising the interest rates to such a level that all optimism disappeared from the Market.
Up until then, up to 2 to 3 days a week, there were Stocks, mainly Internet Stocks, that would rise more than 30% early in the morning, and then fall the same amount five minutes before closing so people could profit.
If you were on the ball, back then, you could make a lot of money as a daytrader.
But then, you could of also lost a lot of money.
Those days no longer exist.
It’s very rare now to see stocks vary more than 30% in one day, so the profit potential first of all is not as great. Also, the ability to catch a percentage of the increase in the price of a stock has also diminished.
One of the reasons was that these internet stocks, which were totally overvalued, are no longer overvalued. As a matter of fact, recently, they have risen much less than any other type of stock.
Another reason was that there were very few IPO’s, and even Google’s IPO did not take off for quite some time. If it was not for the spectacular performance of Google , internet stocks lost more than 8% overall in 2005. Even Ebay lost more than a quarter of its value.
However, if you are a smart investor, you can still make money as a daytrader.
What do you think happens when a company invents say… a car that runs on water? If you could get information about this company early, you could potentially make a lot of money.
So if you are a Stock Market News Hound, and like to get up really early in the morning, you could buy the stock at 6 AM, watch the price rise, and sell it at 9.29 AM to everybody else starting their regular trading day.