- Intraday trading is common in the stock market.stock market analysis screenshot image by .shock from Fotolia.com
Intraday trading, often called "day trading," is the practice of opening and closing a position in any financial market on the same day. Day traders profit from small and quick fluctuations in stock prices. This contrasts with long-term investing, where a position may be held for months or years. The risks in day trading are extremely high, but the potential rewards are also great. There are many benefits to intraday trading.
- By law, day traders who maintain a minimum balance of $25,000 in their brokerage account get access to quadruple leverage by their broker. The Financial Industry Regulatory Authority (FINRA) set this rule, which greatly benefits those who trade on margin. Margin is a common brokerage feature where traders may buy twice as many shares as their cash would allow. While margin offers double leverage, day traders double this leverage even further. Thus it is possible to buy $100,000 worth of stock with a $25,000 account. However, the rule requires that the stock be sold on the same day it is purchased.
- Anyone who follows the stock market knows that prices can open up the following morning at substantially lower levels from where they closed the previous day. Overnight risks can be significant. If major economic or government events occur outside normal trading hours, this could severely affect the stock market's reaction the following day. Intraday traders usually sell all or most of their positions by the close of a day's trading session. Thus they are not at risk when unforeseen events influence the market overnight. They start the next day with no position.
- Day traders who have developed a successful trading strategy can rely on it for their primary income. Many work from home and aim to make earnings comparable to salaried jobs. This contrasts with long-term investing, where daily or monthly profits are not usually expected. The returns from long-term investing are not often treated as ordinary income by most investors, and they maintain jobs independent of their stock market trading. Day traders are a special class of worker who generate consistent income from trading as their primary job.
- Perhaps the most significant benefit to day trading is the potential for huge returns. Successful traders who have spent years of experience developing an understanding of the intraday markets can make extraordinary earnings. This is rare, however. Many successful day traders earn modest livings. But the potential for wealth is always present.