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Today, the Internet
has made possible real-time data delivery and account
access. This technology has given individual investors
the ability to trade stocks and options as easily and
frequently as seasoned professionals. Given such unprecedented
opportunity, many investors have begun day trading - seeking
quick profits by rapidly trading in and out of securities
in a single day. Yet while technology may have simplified
trading, it hasn't lessened the risks - especially for
those who day trade. In fact, direct electronic account
access has shifted responsibility back to the individual
investor. With no broker making a recommendation, it is
up to the individual to make sure that investments and
strategies are suitable to their circumstances. During
"fast market" conditions - when volume and volatility
are both high - the market offers little time to react.
Faced with rapid decision-making, even the most experienced
day traders may get hurt.
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Day trading as been recognized
as a legitimate trading strategy if it is conducted by individuals
who understand and knowingly assume its risks.
On line brokerage firms and regulators are working together
to protect investors who elect to day trade. There is also much
you can do to protect yourself. In fact, whether you are day
trading or investing by some other means, you owe it to yourself
and your hard-earned money to become as knowledgeable as possible.
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Learn how securities transactions
are executed.
Understand the difference between a market order and a limit
order - and the advantages and disadvantages of each. Day
trading requires in-depth knowledge of the securities markets
and trading techniques and strategies. In attempting to
profit through day-trading, you must compete with professional,
licensed traders employed by securities firms. You should
have appropriate experience before engaging in day trading.
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Investigate order-handling policies.
Before you start day trading, be familiar with order-handling
policies and procedures - particularly during times of volatile
prices and high volume. Under certain market conditions,
you may find it difficult or impossible to liquidate a position
quickly at a reasonable price. This can occur, for example,
when the market for a stock suddenly drops, or if trading
is halted due to recent news events or unusual trading activity.
The more volatile a stock is, the greater the likelihood
that problems may be encountered in executing a transaction.
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Know that day trading can entail
high risk
- and that profits aren't guaranteed. Don't use money set
aside for life's important goals, such as retirement, a
college education, or emergencies. Day-trading is not generally
appropriate for someone of limited resources and limited
investment or trading experience and low risk tolerance.
You should be prepared to lose all of the funds that you
use for day trading. In particular, you should not fund
day-trading activities with retirement savings, student
loans, second mortgages, emergency funds, or funds necessary
to meet your living expenses.
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Exercise good judgment.
Be wary of information obtained from unfamiliar sources
or anonymous "experts." Remember that despite any promises
or statements made that emphasize the potential for large
profits in day trading, day trading can also lead to large
and immediate financial losses.
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Recognize technology is extremely
reliable
- but not fail-proof. Heavy traffic may create delays in
order execution, meaning that by the time your order is
executed, the price may have changed. Consider the use of
limit orders as a means of price protection. In addition
to normal market risks, you may experience losses due to
system failures.
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You may pay large commissions.
Day-trading may require you to trade your account aggressively,
and you may pay commissions on each trade. The total commissions
that you pay on your trades may add to your losses or significantly
reduce your earnings.
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Know your tax liability.
Profits on short term gains are generally taxable at a higher
rate than those hold 12 months or more.
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Margin and short selling may
magnify losses.
When you day trade with funds borrowed from either a brokerage
firm or someone else, you can lose more than the funds you
originally placed at risk. A decline in the value of the
securities that are purchased may require you to provide
additional funds to the firm to avoid the forced sale of
those securities or other securities or other securities
in you account. Short selling as part of your day-trading
strategy also may lead to extraordinary losses, because
you may have to purchase stock at a very high price in order
to cover a short position.
Understand what it means to trade on margin. While practiced
by many knowledgeable investors, trading with borrowed funds
may result in magnified losses, even to the point of exceeding
your initial investment.
Trading may have become as easy as "point and click," but there's
still only one way to invest. Investigate before you invest.
Be informed. Invest smart. |
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