Stocks, by their very nature, fluctuate in price over time. That’s the basis of how most investors make profit. Some investors take long-term positions, making very few trades — instead, relying on their confidence that their chosen equities represent solid earnings potential over time. Long-term positions tend to be reserved for the more stable blue-chip companies that represent the “retirement” or “low-risk” portion of an investor’s portfolio.
Day traders are stock market investors who take advantage of small fluctuations in share prices that occur between the opening and closing bell. A day trader closes out all positions at the end of every day, and starts out the next day with a 100 percent cash position in order to make several buys and sells throughout the day.
The SEC has a very specific definition for a day trader, and applies a special set of rules. The agency defines a day trader as an investor who makes same-day buy/sell transactions at least four times during a five-day period. If you buy an equity on Monday and sell it on Tuesday, that’s not considered a day trade. Same-day trades must account for at least six percent of the investor’s activity. If you fit the definition of a day trader, you must maintain at least $25,000 in your trading account. If your equity falls below $25,000 and you still are day trading, you will get a day trading call to make up the difference. Some day traders maintain separate accounts to avoid any confusion, doing their day trading out of one account and other intra-day trading from a second account. The second account would not be subject to the same day trading rules, and would not require the $25,000 minimum.
Intra-day trading, or short-term trading, differs from day trading in that the trader does not limit himself or herself to same-day trades. This sort of trading does not carry the same sort of restrictions as day trading, and you can start this method of trading with a minimal amount of capital. The major difference between the two is that a day trader profits on smaller price fluctuations; the intra-day trader holds positions for several days or weeks at a time in hopes of a larger swing.
Ideally, even if you do have the $25,000 minimum required to be a day trader, the best strategy is to combine both methods of trading. Some stocks that show larger swings throughout the day may be good day trading candidates, but other stocks may show regular swings over time. Intra-day trades may also be a wise choice if you are expecting a particular company to show a surge in activity in the near future.
For example, if you suspect that a corporation is going to announce that they exceeded their quarterly EPS expectations, purchasing the stock before the 10-Q is released–preferably on a “down” day–and holding it for a couple weeks until the numbers are announced would likely yield a considerable profit. The day trader would look at that same equity, but buy it on the morning of the announcement in anticipation of a same-day spike.
Information is for educational purposes only and is not be interpreted as financial advice. This does not represent a recommendation to buy, sell, or hold any security. Consult your financial advisor.
