Many people seriously misunderstand the actual concept of the term ‘day trading’. Contrary to common belief, day trading actually refers to the habit of day traders when they sell off their stock positions prior to the close of the same trading day. In simple terms, day trading means selling off stocks positions in the same day that it was purchased by the investor rather than holding it overnight. Therefore, where a long-term trader buys low and sells high over a period of days, weeks or months, a day trader does the same in a shorter period of time.
Day trading is considered to be one of the safest forms of investment for the fact that it shields investors from the potential losses that they could incur in the event that negative factors affect the stock price with the commencement of the following day’s trading. When judged by definition, many people who believe that they are day traders are, in actuality, mainstream traders simply because they regularly hold their stock positions overnight. The two primary reasons that can encourage them to act so are:
Fear of loss at the end of the trading day if the stock price has declined as compared with the starting price, or Greed for higher returns on investment, especially when a certain event or development is poised to affect the stock price favorably
In either of the two cases mentioned above, investors deliberately set themselves up for the imminent catastrophic elimination of their capital. Many day traders often invest borrowed money so that they are able to reap maximum returns, even on the slightest price movements. Moreover, in order to realize maximum returns, day traders commonly prefer to trade in highly liquid stocks or indexes. Are Day Trading And Investment Similar?
Some experts think of the concept of day trading as noticeably different from investing. They support their theory by citing that investment involves buying a stake in assets that would ideally promise returns over a long period of time. Although the period over which maximum profits can be realized is highly subjective so that it cannot be defined, an investor may own assets for years at the end. This is not the case with day trading as it encourages investors to purchase and sell their stock positions in the same trading day. Some Commonly Used Day Trading Terms
Day traders often come across certain terms during a trading session that is restricted to the specific discipline. Some of these terms are defined below:
Securities – All financial assets that can be assigned a monetary value and which can be traded.
Stocks – A certain type of security that grants, to the bearer of the instrument, ownership rights within a company.
Derivatives – A financial instrument, the price of which has a strong correlation with a related or underlying commodity. The price of derivatives is guided by fluctuations in the value of an underlying commodity.
Trader – The person who is actively involved in the purchase and sale of financial assets and who generally holds assets for a shorter period of time when compared with investors.