Day trading Guide, Meaning , Facts, Information and Description
Day trading refers to the process of buying and selling a stock or stocks within the same day. Day trading is extremely risky and many consider it a form of gambling. Substantial financial losses (or occasionally gains) can occur in a very short period of time.On February 27, 2001, the SEC approved rule changes for margin requirements for those who are considered "pattern day traders". Pattern day traders must have more than $25,000 in their margin trading account but are allowed to trade with twice the leverage of other stock traders.
Day traders typically look to two sources of financial gain. They are same day "swing trading" and "playing the spread". Swing trading (or position trading) is where the trader holds the stock for a short time (usually more than a day) hoping their value will increase.
Playing the spread involves buying at the Bid price and selling at the Ask price. The numerical difference between these two prices is known as the spread. The bigger the spread, the more inefficient the market for that particular stock, and the more potential for profit. This spread is the mechanism that large Wall Street firms use to make most of their money (as opposed to trade commissions) since the advent of online discount brokerages. To make the spread means to simply buy at the Bid price and sell at the Ask price. This procedure allows for profit even when the bid and ask don't move at all.
When the typical online investor places a market order to buy a stock, his broker submits this order to a market maker (MM), who then fulfills the order at the Ask price. In other words, the Ask price is the price the MM is asking for the stock. When the typical online investor places a market order to sell a stock, the broker submits the order to a MM and sells at the Bid price, i.e. what the MM is bidding for the stock.
Due to the liquidity of the modern market, orders are constantly flowing. Many times, a MM will buy a stock just to turn around and sell it to a particular broker. In fact, this is one of the primary purposes of the MM to maintain liquidity in the market (among other things). Through this transaction, the MM will profit anywhere from a few cents to a whole dollar per share, in average circumstances. Over the course of a single day, a MM may fill orders for hundreds of thousands or millions of shares.
Day traders, through the use of modern technology and recent regulations changes (within the last 15 years), cut in on the MMs business action, and take a piece of the pie for themselves. By cutting out many of Wall Streets heavy hitters, day traders have raised the ire of the power elite which, in turn, have created a dim public image of day traders, calling them such things as "bandits" in the first few years, and discouraging many potential traders from ever entering the market.
Day traders are able to capture some of the spread through buying access to Direct-Access Broker systems, rather than by trading through retail brokers. The average online investor uses a retail broker. (All of the brokerages that advertise $15, $10, or $5 commissions to the general public are retail brokers.) Through direct-access brokerage systems, day traders send their orders directly to the ECNss, instead of indirectly through brokers. ECNs put day traders on the same level as MMs.