Monday – Friday from 9.15 Am to 3.30 Pm. Are you aware how much money you can make during this time period almost every day? No? Then, you might not be aware of the term Day trading. Let us discuss what it is and its associated risks.
What is Day Trading?
It is nothing but buying a stock and selling it within the same day. Some features of day trading are,
- Two transactions Long (Buy) and Short (Sell) in the same security on the very same day.
- The first transaction whether is it Buy or Sell is called opening a position and the reverse of it Sell or Buy is called closing that position.
- Execution time does not matter, provided, they happen in the same day.
- No position is held overnight.
- High amounts of leverage(margin) is utilized to capitalize on small price changes in highly liquid stocks. This means your broker will give you the liberty to open a position (Buy or Sell) of upto 20 times of your available cash.
- Reduces risk of falling prices as you don’t keep shares in your account overnight.
- Day Traders usually buy or Sell on borrowed (margin) money.
Day Trading Example
I am sure that the following example will be very sweet and addictive. This sweetness and addiction is the most dangerous part of Day Trading.
Example :
If you are having Cash of Rs. 10,000/- in your stock trading account with your Broker, then for day trading, you can buy or sell stocks with value upto of Rs. 2,00,000/- depending on the category of stock and type of order.
Certain category stocks are given less leverage (margin) due to risk or liquidity issues. This risk evaluation and categorization of stock (equity) is done by stock broker itself.
Suppose you are interested in ASHOK LEYLAND which is trading at around Rs. 93 (Nov 2014). Then, with the cash of Rs. 10,000 in your account, you can buy 100 stocks of ASHOK LEYLAND (Rs 93*100 stocks= Rs 9300)
Now, for day-trading, the broker gives you the liberty of buying or selling for upto 20 times of your cash, i.e. for Rs. 2,00,000 (20*Rs. 10000). You can therefore buy 2,150 stocks of ASHOK LEYLAND with total value of Rs 1,99,950 ( Rs 93 *2150 = Rs 1,99,950).
On the same day, suppose the stock moves to Rs. 95, you make a profit of Rs. 2 from one stock which means you are making a profit of Rs 2*2150 shares = Rs 4,300.
This way, you make 43% profit in one day from your cash of Rs. 10,000 (43% of Rs 10,000 = Rs 4,300). Now, the available cash with you will be Rs. 10,000 + Rs 4,300 = Rs 14,300
This is the dream of every Day trader. Imagine the other way, if the stock price moves to Rs 91 from your buy price of Rs. 93, you will be making a loss of Rs. 2 per stock. Your total loss will be Rs. 4,300/- (i.e 43% loss). Now your available cash will be Rs. 10,000 – Rs 4,300 = Rs 5,700
This is excluding Broker’s commission and other Taxes. By adding the broker’s commission and taxes your balance cash will be around 5,000/-. If you make losses like this for 2 days, you will wipe out all of your trading money.
This happens to almost 90% of day traders. This is the riskiest part of Day Trading.
What is Long and Short
Buying stock to establish a new position or to boost an existing position is known as Buying Long or simply, Long. It is an opening transaction.
To exit a long position or to reduce a current position, the trader would sell which is known as Selling long that describes a closing transaction.
Similarly, selling stock to initiate a new position or to amplify an existing position is known as Selling short (Or selling to open/ going short). It is an opening transaction.
To exit a short position or to reduce a current position, the trader would buy which is known as Buying Shorts (Buying to cover/ Closing purchase) that describes a closing transaction.
The risks in Day trading:
- Financial loss: Initially, you might suffer huge losses. Your knowledge, foresight, judgment, timing or even technology (internet issues) can betray you.
- It is an extremely stressful and expensive full-time job: Stressful because you need to sit and watch the market continuously with great concentration during the day, glued to the computer. Expensive because of the commissions, training and miscellaneous like internet, computer, etc
- Borrowing money for trading or buying stocks on margin: If you lose money in day trading and if you are using borrowed money, then you are in debt. Traders must as well be aware of margins, margin call and the strategies to get over with it.
- Claims of easy profit by trading firms, tips and expert advice from newsletters and websites: One might easily believe such tactics by companies, but they need not be true. A good research on trading firms and what they state is a healthy habit.
In spite of all these risks, there are people who take up day trading for a living. They will definitely be equipped with expensive analytical software, large amount of capital and leverage, a direct line to the trading desk etc. They know very well that Day trading is not a child’s game, it’s a discipline. You need to master it.
Recommended Read :
- What is Rights issue of a Share?
- Convertible Preferred Shares
- What is Capital Market?
- Indian Stock Market Trading Hours
- Guide for Stock Trading in India
- Indian Online Stock Market Trading
- Market Timing of Indian Stock Markets
- Indian Stock Market Holidays
- What is Volatality?
- What is a Volatile Market?
- What is Pre Open Trade Session?
- What is STT All About Securities Transaction Tax?
- IIP Data and Stock Markets
- Online Trading Brokers in India
I have heard this term n number of times in my circles but could not get it. I was actually not able to get this what is its purpose ? Now, I know.The certain examples are really like a case study and they did a lot to let me show off among my friend investors.Very Good!
I like how this article is provided with examples to help explain day training. They help clarify much of the jargon and lengthy statements. Also, it is good she explained all the risks associated as well to caution the reader. Headlines and bullet points also help break up the length of the article to make it more interesting.