It is possible to buy and sell stock in the same day; in fact, some people use this strategy to earn a living. Buying stock at the beginning of the day and selling that same stock later in the day is often called a round trip. Investors who continuously buy and sell stock in the same day are called day traders. Although day trading is usually done by professional investors, advancement in technology has enabled causal traders to use this strategy.
Understanding Pattern Day Trading
The Securities and Exchange Commission defines the 'pattern of day trading' as four or more day trades within five trading days. By the rules of the New York Stock Exchange and the Financial Industry Regulatory Authority, customers who engage in pattern day trading must have at least $25,000 in their accounts, and can only trade in margin accounts. If a trader does not meet these requirements and is classified as a day trader, his account will be frozen for 90 days.
Rules for Day Trading
If an investor is not considered a day trader, it is still possible to buy and sell stock in the same day. The reason some people have trouble closing out a trade that was purchased the same day is that restrictions have been placed on their account by their brokerage firm. Most brokerage accounts are set up with restrictions for beginner traders. Usually, these restrictions can be removed.
However, if the trader believes that account is still too restrictive, other brokerage firms may have different polices. It may be wise to find out what other firms offer, if you are not happy with your current broker.
Quick Exits and Quick Results
In addition to potentially being a very profitable strategy, day trading also comes with two major benefits: quick exits and quick results. Because trades are made in such small time frames, it is harder to generate large amounts of losses that result from sitting out. Therefore, quick exits limit the total amount lost. In addition, quick gains not only help generate cash much more quickly but they also force the trader to gather experience much faster.
Watch Out for Losses
Because of the nature of day trading, some consider it Wall Street's form of gambling reports Wallstreet.com. Even though quick exits limit losses, the high volume and unpredictability of the stock market usually leads to major losses. According the SEC, day traders typically suffer severe financial losses in their first months of trading, and many never graduate to profit-making status. It is estimated that most day traders fail before they truly are able to learn how to be successful at it.
History of Day Trading
Day trading was essentially formed in 1975 when the SEC ruled that fixed commission was illegal and thus marking the beginning of discount brokers. In addition, the creation of the Nasdaq in 1971 helped speed up the process of trading as a result of its electronic communication network. Consequently, these two acts made day trading both possible and profitable. Although it is very popular today, day trading did not really become a common trading strategy until the bull market in 1997. Online stock trading apps means that day trading is now widely accessible.