How to Make Money Day Trading

Ignore the naysayers: Day trading could bring you great wealth.

Nov 25, 2014 at 10:00AM

Money
Source: Wikimedia Commons.

This article was updated on August 12, 2015.

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.

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

Company

Market Capitalization

3-Year Average Beta

Recent Stock Price

3-Month Average Daily Volume

National Bank of Greece (NYSE: NBG)

$2.9 billion

4.1

$0.83

19.1 million

Aeropostale (NYSE: ARO)

$119 million

4.6

$1.50

2.4 million

SandRidge Energy (NYSE: SD)

$311 million

2.6

$0.60

14.1 million

Data: Yahoo! Financial

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 4.1, National Bank of Greece could rise (or fall) 4.1 times as fast as the market if the market's value begins to rise (or fall). Day traders like that potential for speedy gains, as they hope to ride each volatile stock for only a short while. (Of course, many get burned when things don't go their way.) 

Also: note the high trading volume of these stock market minnows, which can both attract and reflect day trading activity. Given their small size, many penny stocks see huge trading activity as a percentage of their market capitalization.

Images

Day trading is an intense occupation. Photo: Flickr user David Blackwell.

Where the money is
If you think these penny stocks present the best opportunity for 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 from day trading?

For starters, you could start a company that runs day trading seminars, charging people $3,000 or $5,000 to learn about something they're likely to fail at. You certainly wouldn't be the first! Alternatively, you could sell trading software or research services to further capitalize on the many failing day-traders out there. You only need to enroll 200 students in a $5,000 course in order to rake in a million dollars!

If you'd like an even juicier return, you could 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, a single day trader placing 30 trades per day for 200 days per year will bring you $6,000 per year. (A thousand day traders? That's $6 million!) To further increase your profits, let day traders borrow from you on margin. You could make more than $2,000 annually in interest payments on every $25,000 they borrow. Clearly, day trading can be extremely lucrative!

And if all of that sounds like too much work, you could always just become an agency authorized by the U.S. government to tax day traders -- like the IRS. The IRS taxes day-trading profits at ordinary income tax rates, because they're considered short-term capital gains. For example, day traders in a 28% tax bracket will pay $14,000 on $50,000 in gains -- as opposed to just $7,500 if they held on to their investments long enough for long-term capital gain rates to apply.

As I hope it's becoming clear to you, the only people reliably profiting off of 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 investing in well-run companies with real competitive advantages -- for the long run. You might not get rich quick, but you'll stand a much better chance of getting rich, period.

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Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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