Many stocks listed on major exchanges like the New York Stock Exchange will double their value over the course of a year. That is why many investors do countless hours of research and pay good money for all kinds of resources to help them pick which stocks are going to perform well in the long term. If you look at the day to day movements of these stocks, however, you will see that these stocks move very little each day and very often go down in price. Other stocks, however, will move several percentage points in a single day. Because of this, a new breed of investor, the “day trader” who seeks to profit from very short term fluctuations in the market has emerged. These investors are called “day traders” because they typically buy and sell the same stock in the same day. This minimizes their chances of losing money should there be bad news while the markets are closed.
The stock market can be a violent place sometimes and reports of better than expected quarterly earnings, a new acquisition, or sometimes no obvious reason can send the price of a stock through the roof. Of course these prices will eventually come down, but if an investor can manage to buy the stock when it is still relatively cheap and sell it at its peak price, they can make a very good profit. It is not uncommon to see cheap stocks on the American Stock Exchange to increase in price as much as 50% in a single day!
Furthermore, if a day trader has a lot of capital to work with, a stock does not have to rise very much for him to make a profit. For example, if you bought 5,000 shares of a stock that cost $30 per share, the stock would only have to raise in price to $30.10 for you to make $500. when you consider that this may only take a few seconds and that you could repeat this process again and again many times per day, it is no wonder many people see day trading as a way to get rich quick.
Obviously, there are great profits to be made by the savvy day trader, but there is great opportunity for loss as well. A trader who holds on to a stock for too long may find himself losing more and more money every second. This problem is compounded by the fact that many day traders purchase stocks on margin (credit). This gives them an edge to squeeze a profit out of even a seemingly insignificant rise in price, but it also means that any loss could be financially devastating.
Also, remember that trading stock, especially “active trading” like this can become very addictive. As the Security and Exchange Commission will be quick to point out, many people see day trading as a form of gambling and some people can become “problem day-traders.
There is a great deal of money to be made day trading, but it is certainly not for everyone. The SEC, for one, highly discourages inexperienced investors from doing it. It does, however, offer more potential for financial success than just about any other kind of work you could have, so you may want to at least look into it.
