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Article Series:
Learn Stock Market Trading Tips
What
is Day Trading?
Day trading is a controversial word in the
world of stock trading. Many see it as a way to make a living
off of the fast paced stock market. The Securities and Exchange
Commission (SEC) warns against the practice and cautions against
getting involved in the practice.
Just what is day trading and why does it cause many to be
cautious? Day trading is the practice of rapidly buying
and selling stock throughout the day in the hopes to profit
from
the marginal changes in the market in that specific day. Ideally,
this practice allows investors to profit from the fractional
increases in the market.
Day traders look at a certain
set of criteria when determining
whether a stock is suitable for day trading. First, the stock
must have a high liquidity. This means that the stock in question
has a large numbers of buyers and sellers. The liquidity allows
day traders to quickly acquire and then sell stock. Liquidity
is based on the volume of transactions on the market, the number
of outstanding shares, the total number of shareholders and
the number of market makers. Most stocks on the NYSE and NASDAQ
have a high degree of liquidity.
A day trader also looks
at volume individually, in addition
to using it as criteria for liquidity. To be eligible for day
trading, a stock should trade at least 500,000 shares a day.
Stocks with 500,000 trades a day or more will allow the day
trader to acquire or sell a large amount of stock without greatly
affecting the price of the stock. Volatility is another factor
in evaluating a stock for day trading. The term refers to the
actual or expected price movement of the stock. This movement
is up or down over a period of time. Day traders look at the
volatility of stocks over an individual day. Stocks that change
price frequently over one trading day are ideal candidates
for day trading. A fluctuation of at least $2.00 per day is
recommended.
Finally, a day trader evaluates
the price transparency of
stock. This term refers to the ability to gather information
on the order flow of a stock. Also called market depth, price
transparency helps the day trader determine just how much money
there is to be made on a certain stock. The Nasdaq II quote
system offers information on all bids. Day traders who arrange
to access the NASDAQ level II quote screens can assess the
strength or weakness of a stock and determine its movement
in price.
While day trading is completely legal and entirely ethical,
it is highly risky. Day traders usually buy on borrowed money
with the hope that they will obtain higher profits through
their acquisitions and sales. People who are deemed “pattern
day traders” by the NASDAQ and NYSE must have at least $25,000
in their accounts and can only trade in margin accounts. Margin
accounts are brokerage accounts in which the broker lends the
investor cash to purchase securities. If the value of the stock
drops significantly, the investor is required to deposit more
cash to cover the margin or sell the stock.
The SEC warns against day trading and has taken many steps
to inform people of the associated risks.
The first few months a vast
majority of day traders suffer massive financial losses and only a few make it through to
become profit-making day traders. For this reason, day traders
should only invest money that they can afford to lose. They
should never use money for necessities such as living expenses,
retirement accounts or second mortgages.
Keep in mind that day traders do not own stocks for longer
than a few minutes at most. Stocks are never kept overnight
because of extreme risk of prices changing to the detriment
of the trader. Day traders do not invest, rather, they speculate
on the movement in price of a stock throughout the day.
There are many websites whose sole purpose is to profit off
those who wish to become day traders. These websites promise
quick returns and offer “hot tips” to their members for a fee.
The sources are most often paid to make these recommendations
and should be avoided. # # # # # SolveYourProblem.com : 2007
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