Why is Day Trading Risky?
If you've never tried day trading, then I'm sure you've at least heard rumors that it can be very risky. Well these rumors are most likely based on facts, because day trading actually is risky to a certain degree. Stock trading in itself is a dangerous business and it's a game that only rewards intelligent people with skills or insiders that have connections higher up on the economic ladder. But when it comes to day trading, things get much more complicated and the level of danger and the amount of risk involved greatly increased. But why is this? Well there's a number of reasons why, and when combined together, all the following reasons make for one very dangerous trading environment.
The most common reason why day trading is risky is because it's harder to profit with safe stocks. In the stock market, it seems that the greater the risk, the higher the reward. While this isn't always true, it's usually the case when it comes to day trading. Day traders often look for stocks that they can buy and sell quickly to make a profit. So they are usually in search of stocks that have wide fluctuations in share price, or ones that are making headlines. Most stocks that have very wide fluctuations and daily differences in share prices are more volatile and risky than those that have more calm in their daily share pricing. The ones that are predictable every day are the ones that are harder to day trade, because if you can predict a stock's movements, than other people probably can too and you've have a problem finding buyers when you're ready to sell.
Now when I say "making headlines", I mean companies or stocks that are in the media for whatever reason. For example, let's say a company like Apple or Microsoft is about to release a ground-breaking product. Sometimes this causes a stock's share price to instantly increase, as more and more people hear about the news and jump onboard to invest in the company. Day traders will often look for news like this before everybody else in the world reads it and before a share price change takes effect. The problem is, sometimes this type of plan can backfire when other news is released about the company on the same that is negative, or if a competitor quickly announces that they have plans to build a superior product. There's always the possibility of things falling apart because of hourly or daily changes that may occur.
Another reason why day trading is so risky, is because of the fact that there may not always be buyers available when you're ready to sell, as I mentioned before. Imagine if you invest in a company and buy their stock based on good news you heard from the media. Now let's say you purchase it at $5 per share, and plan to sell it at $7 per share. But once it gets to $7, there's no buyers and within a few minutes, it drops in value down to $6. Now let's pretend that your first ambition is to hold on to it and wait for it to reach $7 again, but it never does. Now other investors who were waiting to sell at $7 or $8 begin to panic and decide to sell at $6 instead, out of fear that it may decline even lower. With all the sell orders, the share price has been affected and it drops back down to $5 and then even lower to $4. If you sell now, you'll lose money. But if you wait out of hope that it will rise to $6 or $7 again, it may drop even lower to $3 or less and then you'll lose even more money if you sell. So as you can see, many people who are new to day trading or inexperienced lose lots of money due to this exact scenario.
TIn addition to those other reasons, one often overlooked and forgotten hazard is the IRS or tax collectors. Many people who day trade for a living may make some good money at it, but it means nothing if they forget to pay their taxes. Capital gains taxes need to be paid by day traders on all stocks that are bought and sold. Many investors forget about this and don't save some of their earnings to pay the tax on each gain. Forgetting about it can lead to penalties and even more taxes and more money to pay. So many people who day trade end up with nothing or broke because of this common mistake that many make. So if you're just starting to get into, keep this in mind and try to avoid the other pitfalls I mentioned as well.
comments powered by Disqus