Day trading is the buying and selling of securities within a very short time frame.
Strictly speaking, it means that all buys/sells for a given instrument close in the same day — hence the name. But the term has come to apply to other lengths of time as well, from a few days to a month or so.
Originally this type of trading could only be done by brokerage houses; but the Internet made it possible for individuals, and it gained momentum with the advent of the greatly reduced trading commissions we enjoy today.
How does day trading work?
Day traders typically don’t consider the strength of the underlying business when deciding to purchase shares in a company. Rather, they may refer to technical patterns, the momentum of price movements, or some other consideration for their decision.
Day trading is not limited to just equities. One can also purchase options, commodities, futures, and currencies, essentially the same financial instruments that could be held for a longer time can all be bought and then sold on the same day … in other words, “day traded.”
As with all investing styles, there are pros and cons to this method.
Plenty of folks have given day trading a shot (else why would there be a term for it?), and we’re sure some have met with success.
More than a day’s work
At The Motley Fool, however, we believe that day trading may be detrimental to your wealth (and sanity!). We’re all about finding great companies and holding them for long periods, not trying to interpret the blips and dashes on a chart.
There will always be those who have the ability, luck, discipline, and/or temperament to enjoy stretches of success in the riskier end of the investing pool, competing against high-speed firms that have built-in advantages (access and speed, for example) over the individual investor.
But for the average individual investor (and we don’t mean those who grew up in Lake Wobegon, whose children, at least, are all above average), we believe that the risk/reward ratio is way out of balance to the downside. It may be right for some hardy souls, but philosophically, it isn’t our cup of tea.
While they may exist (like unicorns and leprechauns), we are not aware of anyone successfully and consistently making enough money at day trading, over decades, to create the kind of wealth possible with other investing techniques.
Nevertheless, if you came here not merely to satisfy your curiosity, but to begin the process of becoming a day trader — and our warnings have not deterred you from your quest to become the first “legend” of day-trading — we strongly suggest that you consider walking before you run. Learn the ropes of investing before you tread the path of speculation. Even the great impressionist painters learned to paint the “old” way before embarking on the road toward upending the art world with their newfangled ways.
There are many, many different ways to safely tickle your investing fancy. Whether it is income stocks, Rule-Breaker-type tech companies, or even options, The Motley Fool has a service for you. The best thing is that you can try them out … for a whole lot longer than a day (they all come with a full 30-day money-back guarantees).
— Answer provided by Motley Fool members Jeb Sturmer and Kathie Ridgeway