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How to be a Stock Day Trader

By Edited Nov 13, 2013 0 0

Stock day trade investor results

Stock day trading refers to the investment strategy that involves the buying of stocks for the purpose of realizing quick gains. The true day trader executes buy and sell orders on stocks primarily based on the perceived stock price movement. That is, the trader can analyze the market and purchase stock in a company simply because a price trend is detected. They may know nothing about the actual company except for the share price and stock symbol. The day trader uses their own computer and the Internet to execute stock transactions online.

With the recent rise in the value of the market, normal people are considering investing again. There are always ways to make money on the stock market. When prices are rising, stocks are purchased and held. In time, they increase in value. When the stock is sold at the higher price, the investor makes a profit. How much depends on how much the share price has risen and how many shares are sold. Conventional investment strategy dictates that stock market traders should perform research to identify solidly run companies which have the best prospects for future business profitability. This may mean that they have a superior executive team running the company. They may operate in a lucrative field or they may have a new approach to an existing market. The risk of the investment is estimated. The investor decides how much stock to purchase based on available funds and the investor's portfolio. A purchase of stock is initiated through the investor's brokerage account. After purchasing the stock, the investor watches the market to ensure that the research was accurate. Hopefully the share price increases in value as expected. The company operates in an ethical and profitable manner to help maintain the investor's value. If the company is a junior exploration firm with no revenue, hopefully they reveal exciting new discoveries, such as a mineral deposit, that promise to eventually lead the company to profitability.

Stock day trading is often quite a different investment strategy. The investor has a certain amount of money to invest. Using the Internet, the investor checks the market prices, usually with a computerized search tool. Those companies that have the most trading volume for the day are reviewed. Those that have been increasing in value are interesting. If research into a market trading day shows that a company's stock opened at a higher price, and it continues to increase through the day, the day trader may consider purchasing this stock. The investor can look for information that may explain why the share price has risen in price but they often do not. A buy order is entered for the dollar amount that the investor has on hand. The day trader monitors the stock price closely now that they own shares in the company. If the stock continues to increase in value, the stock day trader holds onto the stock. If the price begins to fall, however, the trader may execute a sell order for the shares. Often this buy and sell activity happens very quickly. The trader may only hold the stock in their portfolio for a few hours. Many day traders have a policy of non-ownership at the end of the day. That means that they buy their day trade shares, monitor them during the trading day and sell them before the stock market exchange closes. Thus at the end of the day, the trader actually owns no company shares in their portfolio. This strategy is used since the stock day trader can monitor the market and buy or sell as needed when the stock market exchange is open. Overnight, new information might arise that affects the stock opening price on the next business day. The trader is not willing to risk the possible opening price of the company shares being lower than expected.

Stock day trading is a risky investment strategy. Timing markets based on price information only is risky because price can be influenced by fantasy factors. That is, the price may be increasing in the market for company A shares just because company B is doing well. The price may increase because an investment analyst says that the economic indicators look good. Another analyst may dispute the claim which can instantly turn the market prices around. Volatility can work for or against the stock day trader. The biggest risk is that the stock cannot be sold fast enough if the stock price starts to drop. This is especially true for small capital companies. Unfortunately for the stock day trader, these companies offer the biggest gain opportunities as well.

Consider a day trader interested in stock in two companies. Each share price opened significantly above the prior day's close. In the first hour of trading, each company stock price increases by 5%. The first company is "ABC" which opened at $6.30. The second company is "XYZ" which opened at $0.105. Which is a bettertrade to make? A $1000 investment purchases 158 shares of "ABC" or 9523 shares of "XYZ". If each company increases in value by 20% over the previous day, the investments will each earn money for the day trader. If, however, the price of "XYZ" goes up by 5 cents, or 50%, the stock day trader will make over $425 for the day. It often happens that a low value stock will increase in value by a round number of pennies which represents a significant percentage increase. 50% or 100% gains in low stock prices are fairly common. This will earn substantial profits for the stock day trader due to the large number of shares owned by the investor. This is what makes stock day trading attractive. The risks, however, are very real.

The biggest risk is the liquidity of the shares. A low value company which rises from 10 to 15 cents represents a potential investment growth of 50% for the stock day trader. Being a junior company, there may not be significant interest in the shares when the stock day trader wishes to liquidate the holding. Rather than receiving a sell price of 15 cents, the stock day trader might glut the market when trying to sell 9500 shares. The realized selling price might be 14 or fewer cents per share. This cuts into the profit. Worse, the stock day trader may try to sell the shares and not actually sell any. The stock would remain in the portfolio overnight. If the company stock price was then to open the next day back at 10 cents or even lower, the stock day trader will potentially lose money.

The next biggest risk is the total amount of fees that the buy and sell share orders incur. Traders must pay transaction fees for each buy or sell order. These may be based on the total dollar value of the transaction, the number of shares involved or some combination of both. The day trader tends to make a lot of transactions so many fees will be incurred. It is for this reason that most day traders use a discount stock broker account with ETrade, TD Ameritrade, Scottrade or Tradeking. These firms offer accounts with the lowest stock trade fees in the business. Most of them also offer broker assisted transactions for a higher fee. This can be useful when the day trader suffers a failure with their computer or Internet connection and wants to make their sell order anyway.

Remember that day trading is a risky investment strategy. Do not use this method unless you are willing to lose a significant portion of your investment funds. Check out the markets and use the research available in order to maximize your market knowledge.



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