How to Make Money Day Trading

Frankly, I'm tired of hearing how dangerous and unprofitable day trading is. After doing a little research, I've found several ways to make good money at it.

But first, a little background
By "day trading," I'm talking about folks who buy and sell stocks rapidly during the course of a day, often hanging on to each one for mere hours or minutes. When they want to make money, day traders often pursue companies with high "betas" -- businesses that are more volatile than the overall market. To illustrate, I've assembled a few high-beta companies below:

Company

Market Capitalization

3-Year Beta Avg.

Recent Stock Price*

3-Month Avg. Daily Volume in Shares*

Conexant Systems

$221 million

3.00

$3.39

2.68 million

Powerwave Technologies

$169 million

3.29

$1.27

1.15 million

Ambac Financial (NYSE: ABK  )

$150 million

2.74

$0.52

10.85 million

Borders Group (NYSE: BGP  )

$124 million

4.07

$2.06

2.70 million

Data: Motley Fool CAPS, Yahoo! Finance.
*As of March 26.

The most volatile stocks in the market are often "penny stocks," which trade for $5 or less per share, like those above. With its beta of 4, Borders could rise four times as fast as the market if its shares begin to rise. Day traders like that potential for speedy gains, since they hope to ride each volatile stock for only a short while.

Now, contrast the pennies above with more familiar names from the venerable Dow index:

Company

Market Capitalization

3-Year Beta Avg.

Recent Stock Price*

3-Month Avg. Volume*

Boeing (NYSE: BA  )

$53 billion

1.28

$72.59

6.34 million

American Express (NYSE: AXP  )

$49 billion

2.26

$41.12

9.65 million

Kraft Foods (NYSE: KFT  )

$45 billion

0.59

$30.34

21.41 million

Disney (NYSE: DIS  )

$68 billion

1.19

$35.31

12.41 million

Data: Motley Fool CAPS, Yahoo! Finance
*As of March 26.

These companies' betas vary widely, and their stocks trade for far more than $5 a share. (In fact, when stocks fall to a few dollars or less per share, they're in danger of being booted from the Dow, as happened to Citigroup (NYSE: C  ) .) Kraft's beta is especially low, which would make it particularly uninviting to many day traders.

Also, note these companies' trading volume, which can both attract and reflect day trading activity. The raw number of shares traded may be generally higher on Dow stocks. But given their relative size (around $200 million vs. many billions), the penny stocks see much more trading activity as a percentage of their market capitalization.

Where the money is
If you think that the first group of stocks presents a prime pool of potential day trading profits, you're wrong. There's actually an 80% chance you'll fail at day trading. So how can you make money at it?

For starters, you could join the companies selling $4,000 day trading seminars, to teach people how to do something at which most of them will fail. Alternately, sell trading software or research services to further capitalize on that likely failure.

If you'd like an even juicier return, run a brokerage that gets paid commissions for every purchase or sale a day trader makes. Even at a cost of just $1 per trade, 30 trades per day for 200 days per year will amount to $6,000. To further increase your profits, let day traders borrow from you on margin. You might make more than $2,000 annually in interest payments on every $25,000 they borrow.

And if all of that sounds like too much work, you could always just be the IRS. The agency taxes day-trading profits at ordinary income rates, because they're short-term capital gains. Day traders in a 28% tax bracket will pay $14,000 on $50,000 in gains -- as opposed to just $7,500, if they waited for favorable long-term capital gain rates to apply.

In short, the only people reliably benefiting from day trading are those who don't actually day trade. You're much more likely to profit by taking your time, doing your homework, and finding well-run companies with real competitive advantages. You might not get rich quick, but you'll stand a much better chance of getting rich, period.

Longtime Fool contributor Selena Maranjian owns shares of American Express. American Express and Walt Disney are Motley Fool Inside Value recommendations. Walt Disney is a Motley Fool Stock Advisor pick. Try any of our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.


Read/Post Comments (6) | Recommend This Article (24)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 29, 2010, at 1:38 PM, EditorJim wrote:

    Ironically, I was working in Borders a few years ago when day-trader Mark Barton went on a killing spree after losing over $100k in his day-trading activities.

    12 people killed in that horrible tragedy but what happens? People heard the minor fact that he had supposedly been up big before his portfolio collapsed, and now they wanted a piece of that action! We sold out of every day-trading book within a couple days and had to order dozens more.

    "Hey, it drove him to kill his wife and kids, I wonder if this is for me?"

    Las Vegas is built on the money of people who think they can beat the system, so I guess I shouldn't have been surprised.

  • Report this Comment On March 29, 2010, at 1:44 PM, stan8331 wrote:

    Investing is enough of a challenge for we without putting myself in the position of trying to outsmart Goldman's vast array of day trading computers. One rarely prospers trying to play the other man's game...

  • Report this Comment On July 07, 2010, at 8:31 PM, greggnelson wrote:

    This is a wonderful opinion. The things mentioned are unanimous and needs to be appreciated by everyone.

    <a href="http://currencytradingcenter.co" rel="dofollow">Currency Trading Center</a>

    ************

    gregg

  • Report this Comment On November 01, 2010, at 3:56 AM, Autococker07 wrote:

    It is sad... As a newbie to the investing scene, I have to admit that I am drawn to the sexiness of daytrading... Luckily I had a father who was very conservative (90% GE) and reaped the benifits by harnessing time, instead of rapid growth... I am confident that the more I learn, the more I will follow in his footsteps.

  • Report this Comment On November 22, 2011, at 2:44 PM, cptech wrote:

    As someone who has made more that $80,000 in 4 months day trading, and then gone on to loose more than 85% of both mine and my wife's retirement (3/4 M),and now suffers physical pain & ailments, shame, constant depression and would have taken my own life were it not for my Lord and not willing to leave my wife "holding the bag", ... I would have to agree with your assessment. Please pray for me and other 'fools' like me.

  • Report this Comment On April 28, 2012, at 1:09 PM, sharptrade wrote:

    I have been day trading for a long time with ups and downs. Day trading is like any sport, only the very best survive the way to the top for success. It has many pitfalls, and dangerous misunderstandings. It is absolutely true that 99.999% of day traders will lose all of their playing money within a year. The second year 99.998% will lose money again. The third year, and up to the 10th year, will be a long road of loosing money. But Thank God. There is justice in this world. I will give you rules to have profit in your pocket.

    1) Buy only stock in quantities you are willing to see go bankrupt.

    2) Money is only made on the downside and lost to the upside.

    3) Never short a stock that is not 100% supported by an opposing long shares position (box position.)

    4) only trade with your money and never on margin.

    5) Never sell at a loss. Your better off sticking to the very end of a bankruptcy filing

    6) Trade only one stock in small percentages of your total account value and wait for significant movement to either short or cover your short.

    If you fallow this rules you are likely to trade without loosing your money for the rest of your life.

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