Last updated and reviewed by Gabe Ross on October 16th, 2023
Day trading is a technique of buying and selling the same stocks within the same day. In other words, you close all the open positions on stocks on the same day before the market ends, making a profit or loss on the trades. Day trading of stocks is a short-term gamble and not for the risk-averse, as you can end up making huge losses in a day. Nevertheless, as the saying goes, high risk and high rewards go hand-in-hand. If done right, day trading can make you very wealthy. As opposed to long-term investing, day trading involves holding your positions only for short durations, sometimes even seconds, during trading hours.
Day trading of stocks can be undertaken through both cash and margin accounts. In cash trades, you buy the stocks outright with cash and hence, it is important to have enough money in your brokerage accounts. On the other hand, if you are using margin accounts to day trade, your brokerage firm will lend you the stocks for a fee (interest). In such trades, you should be aware of the higher degree of both the risks (stock price falling below the original price) and the rewards associated with them. While using leverage, always remember to take only as much exposure as you can cover. Otherwise, even a profitable trade can turn out negative in the event of high-margin requirements.
Day trading is often done by professionals, with big trading houses or brokerages employing individual traders who undertake day trading of stocks or other securities on behalf of their clients. However, the easy availability of trading terminals and smartphone applications has made day trading easily accessible for non-professionals.
How to Find Day Trading Stocks
When it comes to the characteristics of day trading, there are three important aspects: Trading Volume of the stock, Liquidity of the stock, and Volatility (price fluctuation) of the stock. A day trader must keep an eye out for these factors to make profitable trades. Timing the stock correctly plays a crucial role in whether you end up making a profit or a loss on the trade.
Day trading of stocks often involves some techniques such as reading technical indicators, employing multiple trading strategies, and leveraging the news coverage of the stocks. Some of the good days to bet on day trading stocks are when statistics such as corporate earnings releases, economic datasets, interest rate announcements, M&A news, or company-level announcements are expected. On such days, stocks tend to swing widely, driven by investor sentiment, and offer attractive price fluctuations that could help you profit from day trade.
If the stock’s price movement goes in the desired direction, coupled with good timing, the day trader can make enormous profits. Some stocks are popular candidates for day trading. These stocks typically have high liquidity, huge trading volumes, and are particularly sensitive to news coverage. Identifying these stocks is important for effective day trading.
Importantly, TipRanks offers a wide assortment of technical analysis tools to study a stock’s historical price and volume pattern and make an educated guess about its future performance. You can leverage these tools to identify potential candidates for your day trading. TipRanks also has a useful tool called News Score, which gives you both the Media Buzz and News Sentiment for a stock. While the Media Buzz identifies the number of news articles in a week, the News Sentiment detects the bearish or bullish tone of the stock’s articles.
Pros and Cons of Day Trading Stocks
Now that you are aware of the basics of day trading stocks, let us delve into their pros and cons.
Pros of Day Trading Stocks
- Easy to Start – As summarized above, carrying out day trading of stocks requires a basic understanding of the stock market, the infrastructure for trading, and a cash or margin account.
- Potentially Huge Profits – If you have been able to correctly bet on the timing of the market and your trading strategy, you can make enormous profits through day trading stocks.
- Absence of Overnight Risk Spill Over – Since in a day trade, you close all your open positions before the market ends. This type of trading protects you from the exposure of overnight risk spillover. Under normal circumstances, if you have any remaining stock positions open overnight, it’s quite possible that any news flashes or economic stats released post-market can unfavorably affect your stock position. The market may open on a weak footing the next day, extending the losses on your stock.
- Possibility of Profits in Bad Markets – A skilled day trader can turn an unfavorable market condition to his/her favor by engaging in short selling. The short-selling technique is also an inter-day trading technique, mostly used in cases when the market is bad or when a particular stock is prone to a downward trajectory. The strategy involves selling borrowed stocks (at higher prices) in anticipation of buying them back at lower prices and pocketing the difference (profit).
Cons of Day Trading Stocks
- Risk of Large Financial Losses – Just as day trading stocks offer the potential to earn enormous profits, the risk of facing large losses is also part of the deal. On a bad day, you can end up making financial losses of large magnitude when the stock’s price moves in the opposite direction.
- Volatility can Sometimes be Trouble – Market volatility can act as a deterrent to earning profits in day trading. Since the window to buy and sell the stock is limited to a few hours (trading day), you may be caught in a downward price spiral during volatile sessions, incurring large losses.
- Huge Risk of Margin Money – As discussed above, traders who take on margin or borrowed money to buy stocks in a day trade expose themselves to high margin risk. If the trade goes south, you will end up paying huge sums to cover the margin calls.
- Day Trading Can be Addictive – Similar to gambling, day traders can easily get addicted to the possibility of earning large profits in a short period of time. You can become fascinated by the attractive profits on a good day and end up making huge losses on a bad day. As a professional day trader, you must not let emotion overshadow reality and know when to call it a day.
- Requires Swiftness – Day trading stocks requires you to be swift in making your trading calls. A slight delay in executing trades can cause a loss instead of a profit, or diminish the possibility of earning larger profits.
- Constant Monitoring – Day Trading stocks also requires you to be super-alert to stock price movement and the flow of the news. You need to constantly monitor the markets, as they can change from bullish to bearish in the blink of an eye.
- Risk of Speculation – In day trading, you also need to speculate regarding the stock’s trajectory or the market’s direction. The speculative bets can work either in your favor and earn you huge profits or give you enormous losses on your trades.
Key Takeaways
Day trading stocks is a fascinating technique to make profits in the short term. Knowledgeable traders use both knowledge and techniques to earn profits in a fast-paced environment. Having known the pros and cons of day trading stocks, you must take your time to practice the technique first with smaller trades and then dive into larger ones. Using the many research tools offered by TipRanks can help you study stocks and their movement, and help you understand if day trading stocks is something you want to pursue.
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