Simply put a day trade is a trade of a stock in which the stock is bought and sold on the same day. For example if I bought CTIC for $1.30 this morning and then sold it for $1.40 this afternoon then that would be considered a day trade but if I sold it tomorrow (or any day after that) then it wouldn’t be.

A Day Trader Is Someone Who Commonly Makes Day Trades

Someone who is defined as a day trader commonly makes day trades but it doesn’t necessarily mean every trade they make follows this pattern. That being said, there are some who never hold a stock over night. These people always sell their stocks before the close of the market (or perhaps in after market trading.)

Why Would You Want To Buy & Sell Stocks In The Same Day?

Some people have a hard time understanding why someone would want to buy and sell a stock in the same day. I think people learn best by example so I’ll try to explain it in that way. Please note that I’m not considering commissions in this example, commissions are something someone needs to think about when they are making a lot of trades.

In one scenario Bob buys 100 shares of  XYZ on Monday for $10 per share (or $1000) and then sells it  on Friday for $11 per share (or $1100.) That’s a 10% gain ($100.)  Someone who buys and sells over a time period like this is usually referred to as a “momentum trader.”

In another scenario Bob buys 100 shares of XYZ for $10 and then holds it for five years. He sells it for $20 for a 100% gain ($1000.) Someone who buys and holds over the course of a long time like this is called a long term investor.

In a third scenario Bob buys 100 shares of XYZ for $10 on Monday and sells it that same day at $11 for a 10% gain ($100.) On Tuesday he reinvests his money ($1100 now) into XYZ again when it drops back to $10 (and it’s common for stocks to move back and forth quickly like this, especially lower priced stocks.) This time he’s able to buy 110 shares. I won’t go through the math of him buying and selling every time but you can see that if he is able to keep playing these back and forth swings “day trader Bob” could come out far ahead of his momentum swinger counterpart in the first scenario.

And while scenario two (where Bob buys and holds for five years) may seem like the best choice, think about how many times Bob could double his money if he were able to play the swings back and forth over that five years instead of just holding. He could certainly double it many more times than just once.

Risk

Is there risk involved in this kind of trading? Absolutely. But is there not risk involved in every kind of stock trading? In some ways I think that traders who buy and sell quickly actually have less risk because we (and yes this is my approach) are able to cut our losses quickly and move on to the next stock rather than buy & holders who often hold through huge losses.

Pattern Day Trader Account

It’s important to note that the SEC has rules which require that brokers flag accounts with a lot of day trade activity (that’s four or more day trades within five consecutive business days) as “pattern day trader accounts.” And if that account does not have $25,000 or more in it, it will be frozen. So if you don’t have $25,000 in your account you must be careful about how many day trades you place.

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