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Avoid Day Trading Your Dollars Down the Drain
from: Kori PuckettDay traders quickly buy and sell stocks during the day, hoping
their stocks will continue climbing or falling in value for the
seconds to minutes they own the stock. This allows them to lock
in quick profits. Day traders usually buy on borrowed money,
hoping that they will reap higher profits through leverage.
Day trading, however, can be highly risky. Most individual
investors don't have the wealth, time, or temperament to make
money and sustain the devastating losses that day trading can
bring.
Here are some of the facts that every investor should know:
-Be Prepared For Severe Financial Losses
Day traders typically suffer severe financial losses in their
first months of trading. Many never graduate to profit-making
status.
Given these outcomes, it's clear: you should only risk money you
can afford to lose. Never use money you'll need for daily living
expenses, retirement, or take out a second mortgage, or use your
student loan money for day trading.
-Day Traders Don't "Invest"
They sit in front of computer screens and look for a stock that
is either moving up or down in value. They want to ride the
momentum of the stock and get out of the stock before it changes
course. They don't know for certain how the stock will move, but
they're hoping that it'll move in one direction, either up or
down in value.
True day traders don't own any stocks overnight because of the
extreme risk that prices will change radically from one day to
the next, leading to large losses.
-Day Trading Is a Stressful and Expensive Full Time Job
You must watch the market continuously during the day at your
computer. It's extremely difficult and demands great
concentration to watch dozens of ticker quotes and price
fluctuations to spot market trends.
You'll also have high expenses, paying your firms large amounts
in commissions, for training and computers. You should know up
front how much you need to make to cover expenses and break
even.
-Day Traders Borrow Money Heavily Or Buy Stocks On Margin
Borrowing money to trade in stocks is always a risky business.
Day trading strategies demand using the leverage of borrowed
money to make profits.
This is why many day traders lose all their money and may end up
in debt as well. You should understand how margin works, how
much time you'll have to meet a margin call, and the potential
for getting in over your head.
-Check Out Day Trading Firms With Your State Securities
Regulator
Like all broker-dealers, day trading firms must register with
the SEC and the states in which they do business. Confirm
registration by calling your state securities regulator, and ask
if the firm has a record of problems with regulators or their
customers.
You can find the telephone number for your state securities
regulator in the government section of your phone book, or by
calling the North American Securities Administrators Association
at (202) 737-0900. NASAA also provides this information on its
website at
target="new">http://www.nasaa.org/QuickLinks/ContactYourRegulator
.cfm.
Just like anything else in life with potentially great rewards,
there's risk involved with day trading. Just make sure you're in
the right mindset and armed with sound information before you
through yourself headfirst into buying and selling stocks.
About the author:
Kori Puckett created and currently maintains
.com. Discover the 8 Most Common Mistakes Traders Make and
How You Can Avoid Them. Visit:
m
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