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A Closer Look At Day Trading
from: Gregg HallDay 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.
About the author:
Gregg Hall is a business consultant and author for many online
and offline businesses and lives in Navarre Florida. Get
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