What is a Day Trade?

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  • Written By: Adam Hill
  • Edited By: Bronwyn Harris
  • Last Modified Date: 19 February 2018
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A day trade is a stock market transaction in which shares of stock or other securities are bought and resold within the span of one trading day. Stocks, currencies, options, and futures are some of the instruments that can be transacted in a day trade. There are many styles of day trading, especially as it has become more accessible to casual, at-home traders. For example, some day traders may invariably exit all positions before the market closes to avoid any unmanageable risks, while others believe it is acceptable to sometimes stay with a winning position after the markets close for the day.

Originally, all important stock trades in the United States were made at the New York Stock Exchange. Investors would contact brokers, who would relay orders to stock specialists on the floor of the exchange. These specialists would each oversee markets in just a handful of stocks, by arranging a simultaneous purchase and sale of stock and writing up a ticket for the sale. This information would then be transferred to both brokers -- the one who placed a sell order and the one who placed a buy order.

Something akin to this process is still used, but the steps have been dramatically streamlined, and computerized to a great degree. The advent of electronic communication networks (ECNs) for the placing of stock orders has gone a long way to facilitate and speed up the process of trading, as well as making it accessible to more people. The internet and online brokerages have made it so that almost anyone can trade stocks.

Because of the large profits that can be made through trading, many people have become involved in day trading from home in an attempt to make an income this way. The risk inherent in a day trade must be understood by people who engage in trading. For people who run hedge funds or otherwise manage large amounts of money, day trading is a way of life. For individual traders, however, the potential losses can be magnified due to the fact that it is one’s own money that is being risked. Lack of education in traders who are more curious than serious can also have unpleasant results.

In learning how to day trade, it is important for beginners to have a plan, backed up by technical knowledge of the market. Before their first day trade is executed, they must know how they are going to place a trade, what they expect to happen, and how they will then exit their position. A beginner should determine individually how much unexpected loss he will tolerate before exiting a position. Strict adherence to well-founded rules will give a day trader a healthy advantage. The famous investor Warren Buffett, known for his witty observations, said it best: “Like the Lord, the market helps those who help themselves, but unlike the Lord, the market will not forgive those who know not what they do.”



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