If you’ve often wondered what is or how day trading works, it’s time to put a stop to those questions. We’ve drafted a simple yet comprehensive article that will tell you all you need to know about day trading in just a few lines. Here we go!
In straightforward terms, day trading means that you have to buy and sell securities on the same day to make a profit.
People who are involved in day trading typically use borrowed money to carry out their transactions. They follow the tiny movements that happen with indexes or highly liquid stocks and take advantage of them.
What Is the General Wisdom?
Buy low and sell high, of course, just like with investment. The difference is that you have to do it all in very little time and multiple times a day.
Here’s an example of how it works, for a better understanding of the process.
Let’s say that you, the trader, buy 1,000 shares of a particular stock at 11:00 AM. After 15 minutes, the price rises. You sell. If the price was up by $0.50, then you will have made a profit of $500. Out of that, you need to deduct the commission that goes to the trading platform which you used to trade. You also need to subtract the taxes you have to pay for your financial gains.
Now, this might seem like little money left to you. However, you should know that a day trader doesn’t trade once or twice a day and then stops. He or she typically trades 25 to 30 times. Therefore, your gains will increase because you multiply the volume of the trades. Moreover, even though you are able to own the stock overnight, most traders opt against that. Doing so is risky because the prices can change radically. That leads to you losing a lot of money rapidly.
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Are You Ready?
You have to be ready literally at a moment’s notice. When it comes to day trading, the market is extremely volatile. It usually changes because of news announcements or corporate events. When it does, you have to be ready to buy or sell in an instant. This means that day traders make their decisions in a matter of minutes, sometimes even seconds. This is how day trading works.
Of course, you should know that there are other options as well. You don’t have to go to the extremes of investing traditionally for years or deciding in seconds in day trading. There is also swing trading, which allows you to own a stock for several days and position trading. The latter makes you the owner of a commodity or stock for a few weeks or months.
This is how day trading works. Evidently, you have to be a very decisive and strong-headed person, who is capable of working under immense amounts of stress and is not afraid to lose money in a moment’s notice. You also have to dedicate a lot of time to day trading because you have to stay on top of the news and in the world of the stocks you have chosen to trade on. Are you ready to do all that?