What Is Day Trading?

If you are new to investing in stocks and shares then you will probably have heard of day trading without necessarily knowing what it is.

Even if you think you know what it is, the chances are that you are unaware of the advantages and disadvantages of day trading compared to other types of investing.

That’s right, day trading is one of the ways that you can invest in stocks and shares but it is not the only way.

So before I confuse you any further, let me explain…

Investing

As I have explained in my previous articles, such as this one here, investing concerns “laying out for profit”.

In other words, it involves buying something (an asset) and holding on to that asset for a while, with the sole purpose of making a profit from it.

When you invest in an asset in this way, there are two ways that you can make a profit from it.

The first way is to sell the asset for a higher price than you bought it for.

This is known as a capital gain.

The second way is to earn an income from the asset during your ownership.

This could be in the form of interest, dividends, rent, or similar.

Holding Period

When you buy an asset, you should have an idea of how long you are planning to hold it for.

In other words, are you investing for the long-term or the short-term?

The longer you hold an asset for, the longer the period of time you have to enjoy an income from it or for it to rise in price.

Of course, the longer you hold an asset, the more opportunity there is for it to fall in price.

If you are investing in shares, then the price of your shares (your assets) is constantly rising and falling in the stock market.

So this issue of the holding period becomes very important.

If you are holding shares for the longer term, then it doesn’t matter if the share price rises and falls from day to day as long as the share price rises over the long-term.

But if you are holding shares for the short-term, then you may not receive any dividends during your period of holding and you are therefore more reliant on the share price movements alone to make you some money.

This also means that you need the share price to rise during the short term and will not be able to recover any large losses that may occur, for example, due to a profit warning.

So, What Is Day Trading?

As the name suggests, day trading involves holding shares for just a few days, at most.

In some cases, day traders will buy shares and sell them again during the same day and some times several times during the same day.

To do this successfully, you need to have a reason to believe that the price of the shares will rise during the next few hours or days.

And you need to be reasonably sure that the company will not announce any bad news, such as a profit warning, during this time.

Indeed news flow is one of the major determinants of a share’s price during the short-term.

The problem you therefore have as a private investor is getting at the news before the big boys in the City get at it and that is impossible or next to impossible at the very least.

So the only other thing you can do is to look for patterns and forthcoming events that you expect will cause the share price to move.

Examples of these include a dividend being paid soon or better-than-expected results being announced.

Stock Trading Software

If you are looking for patterns, then there are a myriad of different indicators and day trading systems that you can use.

And of course, you will need access to real-time share price data like the big boys in the City have.

This means that you need to pay for some stock market software and a data service.

If this is something you are interested in, then you might want to check out Sharescope or Stockopedia.

Make sure you follow one of my ads or the above links to get the “How To Invest In Shares” special offers that I’ve negotiated for you.

Disclosure: The author of this post is a customer and affiliate of Sharescope and Stockopedia

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