Day Trader Guide

Definition

According to the U.S. Securities and Exchange Commission, day traders "rapidly buy and sell stocks throughout the day in the hope that their stocks will continue climbing or falling in value for the seconds to minutes they own the stock, allowing them to lock in quick profits." Day traders are not investors. Investors purchase shares of stock and hold onto them in anticipation of long-term growth. Instead, day traders capitalize on the constant fluctuations of the stock market.

Stocks represent shares of a publicly-trade corporation. They are bought and sold by investors who typically view the shares as part of a long-term investment plan. Company stocks rise and fall in value based on a company's financial results as they related to expected results. Day trading takes very little of this into account, as it is only concerned with rises and falls in the span of a short time frame. Stocks do fluctuate in value throughout the course of a day, but this does open the risk of tremendous loss during a short period as much as it does the opportunity for gain.

There are various strategies employed by day traders to capitalize on the fluctuations of stocks in the market. One strategy is trend trading. Trade Stocks America notes that in this strategy, "it is believed that a stock that is rising will continue to rise, or a stock that is falling will continue to fall." Once a day trader feels that the breaking point has been reached and the trend will shift in the opposite direction, he either buys or sells shares of stock. Contrarian trading is another strategy and consists of trading in the opposite manner of the majority of traders.

Day trading is a legal activity, but it comes with definite risk. Stock market investments are not guaranteed to make money for investors. There are many stocks that have become quite profitable, but this is not always the case and day traders are not immune from stocks that lose money. Beyond the risk of the activity itself, there are fraudulent "advisors" who prey on those considering becoming day traders. These people promise guaranteed return on investments by using "secrets" they've uncovered. The U.S. Federal Trade Commission is taking action against those who make such promises.