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How to Make Money Day Trading


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.

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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Read/Post Comments (5) | Recommend This Article (11)

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 November 25, 2014, at 10:36 AM, malasuerte wrote:

    How do you do this one?

    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.

  • Report this Comment On November 25, 2014, at 10:42 AM, Mathman6577 wrote:

    Good article. The Fool should not be encouraging day trading. It goes completely against its recommendations for long-term thinking.

  • Report this Comment On January 10, 2015, at 12:33 PM, buddyCPFOM wrote:

    Ha... I think this article may have flown over a few heads. ^^^

    Keep trying guys!

  • Report this Comment On February 28, 2015, at 11:38 PM, austinhippie wrote:

    This title was so crazy for a Fool posting, I had to read it. Glad it actually isn't what it seemed. Thanks for keeping the message real!

  • Report this Comment On May 28, 2015, at 12:44 AM, anthonyL319 wrote:

    penny stock trading isn't hard but its stressful at times too, i started trading with 5,000 just to test it out and i lost more than half and i quit , i still looked up stocks here and there then i came across tims guru thing and i signed up and I've made 4,200 so far in 3 weeks! idk if its the strategy or goodlike but i highly recommend you sign up and learn from this guru, heres my link http://profit.ly/guru/timothysykes?aff=5202 if you sign up through this link you get 1 month free!, only for the penny stocking silver subscription, Goodluck and wish you the best in the penny stock game !

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Selena Maranjian
TMFSelena

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

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9/1/2015 12:02 PM
ARO $1.08 Up +0.02 +1.42%
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SD $0.50 Down -0.04 -6.60%
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