- Day trading can be volatilestock market analysis screenshot image by .shock from Fotolia.com
Day trading refers to buying and selling financial instruments within the same day. These financial instruments are usually stocks, currencies, stock options, and different types of futures contracts. Day trading is considered to be much more dangerous and volatile than long-term trading, with potentials for great profits, but also great losses. For this reason, day traders sometimes are referred to as "bandits" or "gamblers." - Day trading is taxed differentlytax forms image by Chad McDermott from Fotolia.com
Federal laws make little distinction between the rules governing day trading and laws governing conventional trading. The main difference between day trading and holding stocks for longer periods of time are the tax rates on any profits that are made. If you purchase a stock and hold it for a year or more, your profits will be taxed at 15 percent, no matter what your annual income is. If you purchase a stock and hold it for less than a year, your profits will be taxed based on your annual income. This means day traders with higher annual incomes will have to give up more of their profits from trading. - Day traders must have cash in accountsstack of cash image by jimcox40 from Fotolia.com
The other main difference between longer-term trading and day trading is the amount of money that the day trader is required to have in an account. The U.S. Securities and Exchange Commission (SEC) states that, under the rules of the New York Stock Exchange, pattern day traders (people who day trade at least four times in five consecutive days) must have a minimum of $25,000 in their accounts. Such traders can only trade using margin accounts. - Each firm has its own rulesoffice building image by Chad McDermott from Fotolia.com
Individual trading firms usually have their own set of rules to protect themselves from risky trading. This includes how much collateral individuals must have when trading, so that when they make bad trades they will have the money to settle their accounts. If you are interested in trading, you should find out what the rules are at the firm you wish to use. - Day trading can be dangerouswarning image by Claire Lloyd from Fotolia.com
Day trading is much more risky than long-term trading when it comes to potential loss of money. According to the North American Securities Administrators Association (NASAA), seven of 10 day traders lose money. Most day traders lose money within the first few months of trading and never make it to a profit-making phase. The SEC suggests that people never use money for trading that they cannot afford to lose, such as money for basic living expenses or retirement. Day traders often rely heavily on borrowed money, which increases the risks that they also will be in debt if they post losses.
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