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Opinions about day trading are as diverse as the stock market itself. Some folks swear by it as the ultimate method to turn a profit, while others, such as the SEC, vehemently discourage it, citing the high risks involved. When it comes to investing and the stock market, you’ll hear all sorts of things about day trading. The key is to sift through the information and make sense of it.

But what exactly is day trading and why is it so heavily cautioned against? Day traders engage in quick-fire trades every single day, constantly buying and selling stocks. Their aim is to catch a rising stock, rapidly purchase a chunk of it, and then sell it as soon as the price has climbed enough to yield a decent profit. If all goes well, the trader makes a profit each day based on the natural ebbs and flows of stock prices.

Day traders concentrate their efforts on specific stocks that are suitable for this style of trading. The most critical factor is liquidity, as the stock must be frequently bought and sold. This ensures that the day trader can easily execute transactions. Liquidity is influenced by market volume, business size, and nature. Generally, nearly all stocks on major exchanges provide ample liquidity for day trading purposes.

For a stock to be suitable for day trading, it must also be traded in sufficient volume to prevent one trader’s activity from significantly impacting the market price. Day traders typically deal with large blocks of stock, so a good day trading stock should have a minimum daily trading volume of 500,000 shares. Additionally, day traders seek stocks with high volatility, where prices fluctuate rapidly. A stock with swift price changes is perfect for day trading, ideally with at least $2 movement per day.

In addition, day traders require real-time information on stock orders, often known as price transparency or market depth. This data allows them to gauge the amount of stock they can likely buy or sell within a specific timeframe. To access this information, traders need NASDAQ level II quote screens.

Day trading itself is not illegal, but it carries significant risks. Nearly all day traders use borrowed funds with the hope of increasing their capital through buying and selling. If someone is classified as a “pattern day trader” by the NYSE or NASDAQ, they must trade through a margin account with a minimum deposit of $25,000. The broker handling the account may require additional deposits if the trader’s holdings decrease significantly in value.

Due to the high risk involved, the Securities and Exchange Commission puts considerable effort into warning against day trading. Their concern is that individuals may jump into the practice without fully understanding the potential for substantial losses in a short period of time.

Any individual who chooses to venture into day trading should expect significant losses as they navigate the learning curve. The reality is that very few will succeed and turn a profit in day trading. No one should ever attempt day trading with funds they cannot afford to lose without serious consequences.

It’s important to steer clear of websites that promote day trading by touting its profit potential and then charging for “expert information” or “hot tips.” These recommendations are typically pay-for-play schemes, and their advice is worthless.

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Ihab Salloum