Day trading is the inverse of the slow and steady approach of buy-and-hold investing. With day trading, you buy and sell investments quickly — in less than a day, hence the name — in the hopes of scoring a profit off of price fluctuations in the market.
This may sound exciting; there is certainly more action involved than the waiting game that is long-term investing. But there is also substantial risk.
What is day trading?
With day trading, you are buying and selling securities, such as stocks, all within the course of a day, often multiple times a day. The hope here is to turn a profit off of short-term movements in prices that arise due to volatility in the market.
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Put another way, day trading is effectively placing “numerous bets on short-term price moves in securities,” said Robert Johnson, a professor of finance at the Heider College of Business at Creighton University, to Business Insider. Day traders are “properly classified as speculators and not investors.”
Day traders often “work for large players like hedge funds and the proprietary trading desks of banks and financial institutions,” which provides a leg up because of their access to helpful tools and capital, said Investopedia. Individual traders can also engage in the practice, though they generally have more limited resources.
What is the allure of day trading?
The major reason that investors day trade is the “possibility of realizing profits within a single trading session, providing investors with opportunities to compound returns quickly,” said Kiplinger. Some investors also enjoy the strategy and expertise involved, as successful day trading requires that they “continuously evaluate market data and make informed decisions in real-time.” There is also the element of power, as day traders are in charge of “monitoring their own portfolio, which gives them complete control over what they do with their investments,” said Business Insider.
How risky is it to day trade?
If you are considering day trading, “make no mistake: you’re facing long odds and steep risks,” said NerdWallet. This includes “sudden market reversals, excessive trading costs, emotional stress and the potential for major losses,” said Kiplinger.
There is also the reality that day trading is hard work. It “requires intense focus and rapid decision-making, which can be draining,” and you will need to “devote a significant amount of time researching, planning and making trades,” said Business Insider.
For most individual investors, it likely is not worth taking the risk or sinking in the time and energy, even for the potential returns. Ultimately, “investors who buy and hold low-cost index funds that track a broad market index like the S&P 500 could see higher returns over a long period,” said NerdWallet.
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