What Is Day Trading? (2024)

Maybe you’ve been talking to a buddy of yours at the gym who’s gotten into a type of investing called day trading. Maybe you’ve got some extra cash and you’re thinking about testing the waters yourself—what could it really hurt?

Wellalmost every single person we’ve talked to who has gotten into day trading has the same story—and the same tragic ending.

At first, they’re all excited. They’re convinced they can quit their day job and make a fortune buying and selling stocks every single day . . . it seems so easy! But then a few months later, they’re stunned when the losses start piling up and they look up and realize they’ve lost all the money they put into it.

Whenever wehear a story like that, Proverbs 28:20 (NKJV) comes to mind, which says, “he who hastens to be rich will not go unpunished.” Let usbe the first to tell you day trading will leave you feeling punished.

Let’s take a closer look at what day trading is, how it works and why you need to stay far, far away from getting caught in that trap!

What Is Day Trading?

Day trading is the act of buying and selling stocks within a very short window of time—we’re talking minutes or hours—with the goal of making a bunch of very small profits that will hopefully add up to big gains over time. A day trader might buy a stock at 9:15 a.m., turn around and sell it at 2:37 p.m. that same day, and then do it all over again with another stock.

The steady rise of online stockbrokers and “do-it-yourself” investing apps makes it very easy for anyone with a smartphone or an internet connection to dabble in day trading . . . but just because it’s easy doesn’t mean it’s smart.

Don’t believe us? Studies have shown that more than 97% of day traders lose money over time, and less than 1% of day traders are actually profitable.1,2 One percent! But of course, nobody thinks they will be the one losing out. It’s like playing a high-stakes poker game: You might win a hand or two here and there, but chances are you’ll leave the table broke and disappointed.

How Does Day Trading Work?

Day traders are not really what you would call “long-term” thinkers. Every day, they’re glued to their computer screens and televisions in order to stay up to date on the news and any trends that might give them hints about which direction a company’s stock will move that day.

Many day traders will buy and sell stocks based on current events—anything from quarterly profit statements to product launches or major announcements. They’re focused on what’s happening right now. Other traders might use sophisticated algorithms or analyze charts to try to figure out when might be the best time to buy or sell.

A day trader tries to make money one of two ways. If a day trader sees that a stock is moving higher or thinks that it might go higher that day, they’ll buy the stock and then sell it once its value goes up. But if the stock’s value drops, then they’ll lose money when they sell it. Pretty straightforward!

On the other hand, if a day trader senses that a stock might take a nosedive that day, they might try to “short sell” it. That’s just a fancy term for betting against the stock. When someone short sells a stock, they profit when the price of a stock goes down.

Market chaos, inflation, your future—work with a pro to navigate this stuff.

With either strategy, day traders are hoping that those stocks will move in the direction they expected them to. They’re not afraid of the stock market’s volatility in the short term. Instead, they want to take advantage of it.

It’s also important to note that many day traders actually borrow money and go into debt to make their trades—they call this “buying on margin” or using “leverage” to buy more stock than they can afford. Wecall it playing with fire, and it’s a good way to get burned. Not only could you lose all the money you’ve invested, you could end up buried under a pile of debt too. Never, under any circ*mstances, borrow money to invest.

Here’s Why Day Trading Is a Bad Idea

1. Day trading is extremely risky.

While most investors might shy away from relying solely on stocks that bounce up and down like a pinball in a pinball machine, day traders love these types of stocks because they might be able to make a quick buck off them.

The problem is, it’s almost impossible to predict which direction these stocks will move throughout the day . . . and one wrong guess could lead to hundreds or even thousands of dollars lost on a single bad trade.

And day traders typically end up on the wrong side of a trade more often than not. A study found that traders who lose money account for anywhere between 72–80% of all day trades being made.3 It’s just not worth the risk!

2. Day trading is very expensive.

If you’re a pattern day trader—anyone who makes four or more “day trades” (that’s when you buy and sell a stock on the same day) within five business days—you have to follow certain rules set by the Financial Industry Regulatory Authority (FINRA).

That means you must have at least $25,000 in the brokerage account you trade with in order to keep day trading—that’s not exactly chump change!4 If your balance falls below that, you will need to deposit more cash into the account before you can continue trading.

Day trading also typically comes with costly commissions and transaction fees that will eat into any earnings you might wind up getting, so your profits need to be high enough to cover those costs. Oh, and your earnings from day trading will also be subject to short-term capital gains taxes, which is the same rate as your income tax rate.5

3. Day trading comes with a high level of pressure and stress.

There’s a reason why more than 75% of day traders quit within the first two years of trading.6 Investing in the stock market already feels like a roller coaster with all the ups and downs. Day trading amplifies that feeling to an extreme level. It’s more like being on one of those drop tower rides at an amusem*nt park that jerks you up and down over and over again—and you can’t get off.

The emotional and psychological toll of day trading has left behind a trail of long-lasting health issues (both mental and physical), broken marriages and even suicide. Day trading isn’t just dumb—it’s also dangerous.

A Better Way to Invest

Listen to us, when you are day trading, you’re not investing—you’re gambling with your money. It’s reckless, risky and extremely unpredictable. And it’s simply not worth your time.

Day trading is basically a get-rich-quick scheme—plain and simple. Some seminar speaker or YouTuber living in his mother’s basem*nt will try to convince you that day trading is a shortcut to making a fortune. But what they won’t tell you is that there’s a difference between getting rich and building wealth. Building wealth is a marathon, not a sprint—there are no shortcuts!

The best way to invest for the long haul is to exercise a “buy-and-hold” investment strategy. That means you’rebuyingshares of an investment and thenholdingon to those shares for a long time. Investors with a buy-and-hold mindset don’t panic or make decisions based out of fear or greed—they know that the stock market always trends up over time, so they know patience and discipline are the keys to successful investing.

So, what should you invest in? Werecommend investing 15% of your gross income in good growth stock mutual funds inside of tax-advantaged accounts like your 401(k) and Roth IRA. Since mutual funds are made up of stocks from many different companies, they give you a level of diversification that single stocks don’t.

There’s a reason why most of the millionaires we talked to for our National Study of Millionaires said their 401(k) was the key to their financial success and not a single one of them said single stocks played a big role in their net worth.

Work With an Investment Pro

Here’s the deal: Investing is too important to do with an app. In fact, 68% ofmillionaires used a financial advisor or investment professional to help them invest and build their wealth!

Our SmartVestor program will connect you with up to five investment pros in your area who can help you get started with investing and walk you through all of your options so that you can make the best choices for your future.

Ready to get started? Find your SmartVestor Pro today!

Make an Investment Plan With a Pro

SmartVestor shows you up to five investing professionals in your area for free. No commitments, no hidden fees.

Find Your Pros

This article provides generalguidelines about investingtopics. Your situation may beunique. If you havequestions, connect with aSmartVestorPro.RamseySolutions is a paid, non-clientpromoter ofparticipating Pros.

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Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.

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What Is Day Trading? (2024)


What Is Day Trading? ›

Day trading is a fast-paced form of investing where individuals buy and sell securities within the same trading day. The primary goal is to profit from short-term price movements in stocks, options, futures, and other financial instruments.

How much money is enough to day trade? ›

The Financial Industry Regulatory Authority (FINRA) requires at least $25,000 in your brokerage account to allow day trading. Otherwise, the broker will restrict your trading ability. You may need more capital depending on how many trades you plan on making.

What is the definition of day trading? ›

Day trading is a form of speculation in securities in which a trader buys and sells a financial instrument within the same trading day, so that all positions are closed before the market closes for the trading day to avoid unmanageable risks and negative price gaps between one day's close and the next day's price at ...

What is day trading simplified? ›

Day trading means buying and selling securities rapidly — often in less than a day — in an attempt to profit off of short-term price movements. If you're researching how to day trade, chances are you're intrigued by the prospect of turning quick profits in the stock market.

What is considered a day trade? ›

Day trading refers to a trading strategy where an individual buys and sells (or sells and buys) the same security in a margin account on the same day in an attempt to profit from small movements in the price of the security. FINRA's margin rule for day trading applies to day trading in any security, including options.

Is $100 enough for day trading? ›

Yes, you can technically start trading with $100 but it depends on what you are trying to trade and the strategy you are employing. Depending on that, brokerages may ask for a minimum deposit in your account that could be higher than $100. But for all intents and purposes, yes, you can start trading with $100.

How much money do I need to invest to make $1000 a month? ›

A stock portfolio focused on dividends can generate $1,000 per month or more in perpetual passive income, Mircea Iosif wrote on Medium. “For example, at a 4% dividend yield, you would need a portfolio worth $300,000.

Is day trading illegal? ›

Day trading is not illegal when it is done within normal trade hours and properly recorded. However, a similar practice known as late day trading is illegal and can be prosecuted under commodities fraud law.

Is day trading like gambling? ›

It's fair to say that day trading and gambling are very similar. The dictionary definition of gambling is "the practice of risking money or other stakes in a game or bet." When you place a day trade, you're betting that the random price movements of a particular stock will trend in the direction that you want.

How many hours a day do day traders work? ›

Most independent day traders have short days, working two to five hours per day. Often they will practice making simulated trades for several months before beginning to make live trades.

Why is day trading not worth it? ›

It's Very Costly. Every time you buy or sell a stock, there are commissions (i.e. brokerage fees) and taxes involved. Because of the high-frequency of trades being placed, these numbers add up very quickly — to the point where it can eat into a significant portion of your profits (or even turn a profit into a loss).

How much money do day traders with $10000 accounts make per day on average? ›

With a $10,000 account, a good day might bring in a five percent gain, which is $500. However, day traders also need to consider fixed costs such as commissions charged by brokers. These commissions can eat into profits, and day traders need to earn enough to overcome these fees [2].

Is trading gambling or not? ›

Making some trades to appease social forces is not gambling in and of itself if people actually know what they are doing. However, entering into a financial transaction without a solid investment understanding is gambling. Such people lack the knowledge to exert control over the profitability of their choices.

What is not considered a day trade? ›

Security position: Day trading applies to virtually all securities—stocks, bonds, ETFs, and even options (calls and puts). Same day: If you do a round trip on the same day, it's a day trade. If you hold your security position beyond the close of the trading day, it's not a day trade.

Can you make $200 a day day trading? ›

A common approach for new day traders is to start with a goal of $200 per day and work up to $800-$1000 over time. Small winners are better than home runs because it forces you to stay on your plan and use discipline. Sure, you'll hit a big winner every now and then, but consistency is the real key to day trading.

Is $500 enough to day trade? ›

Can you start day trading in the US with $500? Yes, there are many trading platforms that allow customers to begin trading with low sums.

Why do you need $25,000 to day trade? ›

Ultimately, the purpose of the $25,000 minimum equity requirement is to ensure that day traders have enough capital to cover their potential losses and to prevent market manipulation. It also protects brokers from financial risks and helps maintain the stability of the trading industry.

Can you day trade with $2000? ›

You must follow the same margin requirements if you're an occasional day trader, meaning you must have a minimum equity of $2,000 to initially buy on margin and meet the Regulation T requirements . You must have: 50% of the total purchase amount. Keep at least 25% equity in your margin account.

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