【TEJ Dictionary】What is Day Trading ? TEJ Guides You Through The Basics From The Ground Up
Oct 02 2024
Preface
Have you ever heard friends excitedly discuss: “Today is perfect for day trading! Stock prices will have big intraday swings, hurry and jump in to make a profit!” Such enthusiasm might tempt you, but also leave you wondering: What exactly is day trading? Is it really that easy to make money, or is there hidden risk behind it?
Don’t worry, this article will unveil the mystery of day trading. TEJ will take you through the mechanisms and risks of day trading, and explain why this “buy and sell within a day” strategy attracts so many eager traders.
What is Day Trading?
In fact, “Day Trading” includes the meaning of “Same-Day write off “! The term “write off ” refers to offsetting positions, a common concept in accounting. For example, when a company finds an accounting entry was incorrect, it uses an offsetting entry to correct the mistake.
The concept of day trading is somewhat similar: In the stock market, day trading refers to buying and selling the same stock within the same trading day, either buying first and selling later, or selling first and buying later. In regular stock trading, you’re required to wait until the next trading day to sell after buying, which highlights the advantage of day trading.
Does Day Trading Have Advantages? Why Do So Many Follow It?
No Capital Required
In the day trading strategy, you don’t need to have cash or stock at the start. If your judgment is accurate, you can leverage market volatility to earn the spread.
For example, let’s say you believe a stock will drop today, and it is currently priced at NT$100 per share. You sell 100 shares, gaining NT$10,000 in cash. By the afternoon, the price drops to NT$95 per share, and you use the NT$10,000 to buy back the 100 shares for only NT$9,500. After subtracting your buyback cost, you’ve made NT$500. This is a classic “no-capital trade,” as you didn’t use your own money. Of course, in reality, you still need to consider transaction fees and liquidity.
Half Tax Reduction
To stimulate the stock market, the government introduced a policy halving the transaction tax. Normally, the transaction tax is 0.3% in Taiwan, but for day trading, it’s reduced to 0.15%. This significantly lowers trading costs, which is crucial for day traders, as day trading often involves high leverage, increasing transaction amounts and tax burden. If taxes are too high, they will gradually eat into profits, shrinking what could have been a good return. Thus, this tax reduction is a major benefit for day traders!
What Are the Disadvantages of Day Trading?
High Time Investment
Day trading requires close monitoring of market fluctuations and staying on top of trends. Professional day traders often watch 1-minute or 5-minute Candlestick, which consumes a lot of time and can be mentally exhausting. Sometimes, day traders are so focused that they barely have time for breaks during market hours. Moreover, the potential rewards are directly proportional to the risks, and trading costs like transaction fees and stock borrowing fees can add up.
Lack of Risk Awareness
Traders with insufficient capital often resort to no-capital day trading, which can lead to overlooking risks. Given their limited ability to bear losses, this can result in failed settlements or credit issues. If unfortunate Credit Default Swap, brokers can charge up to 7% of the transaction value as a penalty, and pursue debt recovery and related costs. Such defaults will leave a mark on the defaulter’s credit record, making it harder to get a credit card or mortgage in the future.
Limited Stock Selection
In Taiwan, Day trading is restricted to stocks that are part of the Taiwan Stock Exchange’s “FTSE TWSE Taiwan 50 Index,” the “TSEC Taiwan Mid-Cap 100 Index,” and the Taipei Exchange’s “TPEx 50 Index.”
Additionally, stocks that undergo trading method changes, disciplinary actions, or are listed on the Innovation Board or registered on the Strategic New Board are not eligible for day trading.
Types and Qualifications for Day Trading
Given the inherent risks of day trading, the Taiwan Stock Exchange (TWSE) only allows investors with sufficient trading experience to engage in day trading. Day trading is further divided into regular stock day trading and margin day trading, where margin refers to margin financing and short selling, which carries higher risks compared to regular stock trading. Therefore, the qualifications are stricter. Below are the qualifications based on TWSE regulations:
Regular Stock Day Trading
- The trading account must have been open for at least three months.
- At least 10 completed trades within the past year.
- Day trader must sign a “General Authorization Agreement” and a “Risk Disclosure Statement” with the brokerage firm in advance.
Margin Day Trading
- The trading account must have been open for at least three months.
- At least 10 completed trades within the past year.
- The total trading amount in the past year must exceed NT$250,000.
- The investor must open a margin account.
Note: The tax reduction benefit only applies to regular stock day trading, not margin day trading.
Does Day Trading Really Make Money?
Does day trading really generate profit? The answer varies from person to person. However, looking at the data from the Taipei Exchange (TPEx), in 2023, the total amount bought in day trading was NT$7.33 trillion, while the total amount sold was NT$7.34 trillion. At first glance, the return seems positive, but let’s break down the fees and taxes:
- Purchase: NT$7,333,678,450,980 * 0.1425% = NT$10,450,491,793
- Sale: NT$7,347,038,506,870 * (0.1425% + 0.15%) = NT$21,490,087,633
- Total cost: NT$7,333,678,450,980 + NT$10,450,491,793 + NT$21,490,087,633 = NT$7,365,619,030,406
- Net earnings: NT$7,347,038,506,870 — NT$7,365,619,030,406 = -NT$18,580,523,536
Based on this data, we can roughly see that the majority of people lose money when engaging in day trading. Of course, if you can secure lower transaction fees from a broker, your chances of making a profit may increase slightly. However, day trading remains a highly speculative and risky activity, and investors should evaluate it carefully.
Does calculating all these fees manually sound exhausting? Don’t worry, TEJ has already organized everything for you! Just log into TEJ PRO and select “Day Trading Statistics” from the capital database, and you’ll have access to all the relevant data. The data is updated daily before 10 PM, with additional filtering options to make finding the information you need even easier!
Conclusion
Day trading has undeniably increased market activity, boosting the liquidity of many stocks. This article has explained that day trading offers advantages such as tax reductions and the ability to trade without significant capital. However, making money through day trading requires attention to many factors, especially considering that the daily movement of Taiwan’s stock market is often limited. In this context, transaction fees and taxes play a critical role in profitability. Ultimately, day trading is a high-risk strategy and one of the most challenging approaches, requiring careful consideration of market conditions, intraday information releases, and technical analysis.
Further Reading
- More Day Trading Legislation
- TWSE Day Trading Section
- Taipei Exchange (TPEx) Intraday Trading Statistics
- More Articles on Financial Knowledge
- What Is Odd Lot Trading? TEJ Guides You Through The Basics From The Ground Up
- What are treasury stocks? TEJ will tell you treasury stocks’ advantages, disadvantages, and inquiry channels.
- More about TEJ Financial Data
- Mastering the Dynamics of Financial Data Sourcing: A Strategic Guide
