Keyword: day trading for beginners, learn stock trading
Day trading is quite tempting and irrefutable, especially earning from your trades in the comfort of your house feels far more thrilling than most of those 9-to-5 jobs. However, it’s not all sunshine and rainbows, especially for the inexperienced beginners, as they can ruin their portfolio in just the blink of an eye.
However, those failures can eventually turn into the learning experience you may need the most. If you’re interested in learning day trading and how it works without even wrecking up your portfolio, then here in this article, you will learn how to minimize the risk in day trading for beginners, even in the beginner stage.
Explaining Day Trading
Day trading is known as the practice where an individual can buy and sell stocks in a brief time frame, generally a day. The main aim of this practice is to earn a small profit on each trade and later cumulate those earnings with time. However, with the rise of online brokers, the risk in day trading has also increased. Thus the investors need to well-plan everything to gain profit strategically.
Generally, it’s seen that retail investors face a tough time earning money from day trading. According to a 2010 study, it’s found out that only 1% of day traders steadily earn money. But it comes out as the small number who consistently earn money through devoting their entire day, making it a full-time job. However, it sounds a little risky for some as the day traders generally engage in quick trading which is done during lunch or free time.
But if it sounds a bit risky for you, you can also do what many investors generally do: buy-and-hold stocks, engage in long-term investment in a well-diversified portfolio, including ETFs and low-cost funds. So by making small but regular investments through your account, you can have the power of building a strong and robust portfolio with long-term gains.
Though it’s not that thrilling compared to day trading, if you are eager to grow your long-term wealth, this would help you greatly. But if you’re willing to practice day trading, it’s better to develop proper planning and strategy.
How Does Day Trading Work?
Volatility is the synonym of day trading for beginners as they rely completely on the market or stock fluctuations to gain profit. However, they are like stocks that fluctuate a lot during the day no matter what will be the case- positive or negative market news, good or bad reports, or merely stock market view. Even these are more likely liquid stocks, which allows them to move furiously without affecting the actual stock market.
Day traders generally focus on learn stock trading. They invest in stocks if it’s shifting higher or short-tell in the case of lower movement. So they can balance the stock’s fall. Even day traders usually trade the same stock several times in a day. It means buying it at once and selling it in short-sell to earn profit from the changing stock sentiment.
Generally, to gain more profits, traders use borrowed money for trading; this is known as buying on margin. Through a margin account, the trader can use the securities they have already owed as leverage to acquire up to 50% of the security’s value, which they’ll buy. Leverage like this can boost your profits compared to the one you buy with your own money. But it could also exponentially amplify the risk of losses too.
Let’s take a look at how it works. If an individual wants to buy a stock worth Rs.20,000, then you can purchase shares worth Rs.10,000 and borrow the rest Rs.10,000 from the brokerage firm. So if you buy it at 10% per share and the price increases at 20% to 12% per share, you can earn Rs.24,000 even after returning the borrowed money.
But if the stock price drops by 20%, then the same rule will apply here. Then if you sold the share at 8%, you’d attain a 40% loss compared to the previous 40% profit. Thus, it’s quite risky. However, the above example doesn’t include the amount you’ll pay on the margin loan.
The Securities and Exchange Commission explained that day trading doesn’t come under-investing. In other words, investing includes a fundamental analysis of stocks and their movement determined by evaluating the past data to figure out the long-term future goal.
However, day traders use expensive technical analysis and state-of-the-art technology to find intraday trends to gain profits. Thus, the Financial Industry Regulatory Authority came up with some rules to monitor this fast-moving day trading practice. So they can educate the traders and help them cope with the loss.
Pattern and Risk
If an individual enforces four or more trades during the five-business-day period with a total trade of all your trade, including 6% or more, you fall into a pattern day trader category. However, as a pattern day trader, one should maintain Rs.25,000 capital in their trading account, and the amount must be in the account before they begin trading. But, if their amount falls beyond this, they aren’t allowed to trade anymore until their securities reach Rs.25,000 or above.
Well, it comes under the pattern of day trading as in addition to your fixed Rs.25,000, you’ll also need to maintain a margin amount. Thus, under the rules set by FINRA, the maintenance margin amount must be 25%, which means that you must hold 25% capital in your account after buying any share.
For instance, if the total amount of securities in your account before purchase were Rs.50,000 and you had a margin loan balance of Rs.20,000, then your capital would be Rs.30,000. So you can operate day trading without any issues according to the FINRA rules.
But, if in case the amount drops 25%, then your brokerage may strike you with the margin call. So, in this case, you have to buy security or cash to maintain the margin amount immediately. But if you failed to do that, your brokerage would sell all of your securities without consulting you.