The Not-So-Hidden Risks of Day Trading

Day trading has been a hot topic of conversation in the past few years. Have you wondered what all the buzz is about?

A simple explanation of day trading is buying and selling stock on the same day. Day traders are betting that they’ll make a lot of money in a short time, so they watch security prices closely to achieve their goal.

However, day trading is a very risky form of investing. A day trader’s profits may not even cover their transaction costs, including taxes and other fees, and losses are much more likely. In fact, many financial advisors and professional brokers believe that the risks far outweigh potential gains. Warren Buffett, one of the most successful investors of all time, is famous for saying: “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.” Not a day trader, it seems.

So, what does that mean for the average investor?

First, the U.S. stock market requires you to have a minimum of $25,000 in order to engage in day trading. And, according to a recent article by day trading expert Cory Mitchell, you shouldn’t risk more than 1% of your account balance on a single trade.

Plus, there are tax consequences. Your profits would be liable for a short-term capital gain tax at the income tax level you fall under. If you have a loss and then repurchase that same investment within 30 days, the IRS says you can’t deduct the loss on your tax return like you’d be able to with other kinds of trades.

Other Factors to Consider

• Market volatility (instability) is a major factor that hurts day traders. No one can predict the minute-to-minute changes in the market, no matter how many charts and models they use.
• You may need large amounts of capital. Most day traders make large trades by borrowing or leveraging capital. But since the risk is very high, if you judge poorly, you could lose everything—and have to repay what you’ve borrowed.

Although day trading has the potential to earn higher gains, it’s best to stick to more traditional methods of investing unless you have nearly unlimited capital.