VIDEO LESSON - The Advantages and Disadvantages of Day Trading
Day traders buy and sell stocks throughout the day with the hopes of cashing in on small fluctuations in the price of highly liquid stocks or indexes. As with investing, the ideal situation involves buying low and selling high, but in this case the time frame is shortened from years to hours. Day traders want to make money by successfully completing numerous sales in the same day.
Pros
The most touted pro of day trading is that it can earn you serious
money, provided that you can afford to take the risk, understand the
inner workings of the marketplace and have a well thought out strategy.
You can increase your returns through leverage (money that you borrow to
make more money). If you find work with a large institution, you may
gain access to expensive software and a direct line to the dealing desk,
along with other perks and resources.
Day traders play a role in the overall marketplace, thanks to arbitrage -- a common day trading strategy that involves identifying market discrepancies. An asset's price should be the same across the board, but if this is not the case and you see the difference fast enough, you can sell the higher-priced asset and buy the lower priced one.
Cons
The bottom line is that day trading carries a high risk. There is never a
guarantee that you will make money. In fact, according to the U.S. Securities and Exchange Commission, "day traders typically suffer severe financial losses in their first few months of trading."
Day trading is expensive. You need software and the right computers to spot the price variations and access the necessary financial information. Because you may acquire capital losses and gains as a day trader, taxation can become a nightmare.
"When the market is in a churning period in which there is not significant upward or downward movement, then daily traders tend to lose money, especially after consideration of the commission costs and the bid-ask spread that they are frequently trading into," says Walt Woerheide, dean and professor of investments at The American College in Bryn Mawr, Penn.
