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Today, the Internet has made possible real-time data delivery and account access. This technology has given individual investors the ability to trade stocks and options as easily and frequently as seasoned professionals. Given such unprecedented opportunity, many investors have begun day trading - seeking quick profits by rapidly trading in and out of securities in a single day. Yet while technology may have simplified trading, it hasn't lessened the risks - especially for those who day trade. In fact, direct electronic account access has shifted responsibility back to the individual investor. With no broker making a recommendation, it is up to the individual to make sure that investments and strategies are suitable to their circumstances. During "fast market" conditions - when volume and volatility are both high - the market offers little time to react. Faced with rapid decision-making, even the most experienced day traders may get hurt. |
Day trading as been recognized as a legitimate trading strategy if it is conducted by individuals who understand and knowingly assume its risks. On line brokerage firms and regulators are working together to protect investors who elect to day trade. There is also much you can do to protect yourself. In fact, whether you are day trading or investing by some other means, you owe it to yourself and your hard-earned money to become as knowledgeable as possible.
Learn how securities transactions are executed. Understand the difference between a market order and a limit order - and the advantages and disadvantages of each. Day trading requires in-depth knowledge of the securities markets and trading techniques and strategies. In attempting to profit through day-trading, you must compete with professional, licensed traders employed by securities firms. You should have appropriate experience before engaging in day trading.
Investigate order-handling policies. Before you start day trading, be familiar with order-handling policies and procedures - particularly during times of volatile prices and high volume. Under certain market conditions, you may find it difficult or impossible to liquidate a position quickly at a reasonable price. This can occur, for example, when the market for a stock suddenly drops, or if trading is halted due to recent news events or unusual trading activity. The more volatile a stock is, the greater the likelihood that problems may be encountered in executing a transaction.
Know that day trading can entail high risk - and that profits aren't guaranteed. Don't use money set aside for life's important goals, such as retirement, a college education, or emergencies. Day-trading is not generally appropriate for someone of limited resources and limited investment or trading experience and low risk tolerance. You should be prepared to lose all of the funds that you use for day trading. In particular, you should not fund day-trading activities with retirement savings, student loans, second mortgages, emergency funds, or funds necessary to meet your living expenses.
Exercise good judgment. Be wary of information obtained from unfamiliar sources or anonymous "experts." Remember that despite any promises or statements made that emphasize the potential for large profits in day trading, day trading can also lead to large and immediate financial losses.
Recognize technology is extremely reliable - but not fail-proof. Heavy traffic may create delays in order execution, meaning that by the time your order is executed, the price may have changed. Consider the use of limit orders as a means of price protection. In addition to normal market risks, you may experience losses due to system failures.
You may pay large commissions. Day-trading may require you to trade your account aggressively, and you may pay commissions on each trade. The total commissions that you pay on your trades may add to your losses or significantly reduce your earnings.
Know your tax liability. Profits on short term gains are generally taxable at a higher rate than those hold 12 months or more.
Margin and short selling may magnify losses. When you day trade with funds borrowed from either a brokerage firm or someone else, you can lose more than the funds you originally placed at risk. A decline in the value of the securities that are purchased may require you to provide additional funds to the firm to avoid the forced sale of those securities or other securities or other securities in you account. Short selling as part of your day-trading strategy also may lead to extraordinary losses, because you may have to purchase stock at a very high price in order to cover a short position.
Understand what it means to trade on margin. While practiced by many knowledgeable investors, trading with borrowed funds may result in magnified losses, even to the point of exceeding your initial investment.
Trading may have become as easy as "point and click," but there's still only one way to invest. Investigate before you invest. Be informed. Invest smart.
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