Day Trading and Associated Risks
Investing comes with risks. Depending on how much risk an investor is willing to take, certain investment strategies may be ideal while others are a no-go area.
Day trading is one of the investment strategies for investors who want to make a quick return within a day. These investors are called day traders. Day trading can be risky but it is critical to have a good knowledge of how much risk you would be exposing yourself to so that you can make an informed investment decision.
Most day traders make little money if they make any at all and can end up turning in a net loss at the end of a day’s trading.
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What exactly is day trading?
It is simply buying and selling stocks within the time limit of a day — trading stocks within one day. In day trading, buying and selling are done between a few seconds to a few hours of the same day. Day trading is simply capitalizing on quick market trends and consistently monitoring the market to find times to go in and turn in a profit.
With the influence of the Covid-19 pandemic and its impacts on the market, the risks involved in day trading have increased exponentially because the market is more volatile than ever and it is easy to lose money compared to when trading using other available trading strategies.
Trading styles and the inherent risk with day trading
Investors can participate in day trading, which involves buying and selling within a day. They could also invest in pattern trading over a few days or a week. Alternatively, they can invest in swing trading, which happens within a few weeks to months. Aside from these relatively short-term trading strategies, investors can decide to invest in the long term, which involves trading up to a year or more. Other strategies like dividend trading, pay a portion of the profit of companies when you buy stocks.
In day investments, there are rules against pattern day trading which involves the process of completing a minimum of four-day trading events per week. Also, day traders must maintain a minimum margin balance of 25% regardless of the purchases made. These rules and many more are to shield against the enormous risks of these specific strategies of day trading. These rules are usually accompanied by a warning from the Securities and Exchange Commission about the extreme stress, expense, and financial risks associated with day trading.
In the long run, less than 2% of investors in day trading earn a steady income.
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Conclusions
Most people who engage in day trading do not have a long-term investment strategy. Make sure you know what you are getting into before you think of investing in day trading. It is incredibly risky and the returns are not guaranteed. With the added disadvantage of a fluctuating market post-pandemic, it is vital to know that the risks are even higher if you intend to benefit from day trading.
