There are different ways to make money in the stock market. For example, although it is advisable to buy a stock and hold it for an extended period, some people choose to buy and sell it on the same day.
Can you buy and sell stock on the same day?
Yes, you can. This activity is known as day trading or an intraday operation. Continue reading to find out the restrictions.
What is Day Trading?
Day Trading is when one or several shares are bought and sold on the same day. The main objective of this operation is to obtain short-term profits.
The Financial Industry Regulatory Authority imposes specific restrictions on daily buyers, and also the broker himself may limit trading activity or margin trading on the account.
You need to apply a proper methodology to carry out these trades correctly. A convenient strategy is to buy at the lowest price of the day and sell at the highest. This is more complicated if you are a novice.
How does Day Trading work?
The best thing to do is to carry out a strategy and take into account the following points:
- Purchase shares first thing in the morning.
- Keep the shares bought until the market shows signs of weakness.
- Take into account that, as in any stock market negotiation, you must pay a commission fee. In this case, two commissions, one for buying and one for selling.
- Buy at a fixed stock price.
- In bearish periods it is possible to find shares with an upward trend in the stock market session, and you can take advantage of it to make intraday operations.
- When making a day trade with indexes in a downtrend, increasing profits in the same trading session is very difficult.
Requirements for Buying and Selling Stocks on the Same Day
Anyone who makes four or more trades each day, i.e., buys and sells stocks on the same day during a 5-day trading period, is classified by FINRA as day trading.
To engage in daily trading at that frequency, the shareholder must have at least $25,000 in cash and shares in his investment account and must also have his broker’s authorization to purchase shares on margin.
Cash Settlement Period
A margin requirement is the percentage of marginable securities an investor has to pay for with their cash account.
If a person trades a stock frequently, he must consider that he will not get the cash instantly but needs to allow three business days for the settled funds to reach his account. This period is known as the settlement period.
Limits from your brokerage
Another drawback to this activity of buying and selling shares on the same day is that the investor’s brokerage account may restrict the ability to buy and sell on the same day. If you are a novice investor or an investor with little experience or unsettled funds, trading limits will likely be imposed on your brokerage account.
Same Day Buying and Selling Rates
To ensure that day trading is more profitable for the interests of small and medium-sized investors, brokerages and financial institutions have created competitive fees that meet their particular characteristics. As a result, day trading rates are varied. For example, they may include fixed rates that include a certain number of trades per day or bonuses.
They can also offer discounts to investors who transfer their portfolios from another entity. Commercial banks and savings banks increasingly use this strategy.
It would be best to choose the rate according to the frequency you trade every day. This is because the rate depends on the frequency shares are bought and sold. Also, whether they are concentrated in the same session, these rates help to leverage domestic or international trades and allow you to buy at improved prices.
Day Trading Drawbacks
On the surface, day trading can seem exciting and attractive. However, it is common to think that it is just a matter of buying shares and waiting for them to go up a few cents during the day, selling, and repeating the process.
The reality is that it is much easier said than done. Profiting from intraday trading is much more complicated as there can be complications and drawbacks that can prevent a successful day trade.
Here are some of the reasons why intraday trading is not as profitable as it sounds:
If an investor manages to overcome the drawbacks of intraday trading and realizes gains on the shares he bought and sold the same day, those gains will generate taxes that he must pay. These may be capital gains taxes. This is because income earned from day trading meets the IRS definition of a short-term capital gain.
This implies that you suffer deductions just like the income you usually earn from your employment.
Little Chance of Success
From the outset, day traders who risk investing in stocks that they will sell the same day are inherently disadvantaged. This disadvantage is due to bid-ask spreads.
A bid is the highest price a day trader is willing to pay for a stock. While the ask is the lowest price, someone is willing to sell a stock, and usually, this price is higher than the offer price. The more a stock is bought or sold, the narrower the gap between bid and ask, but there will still be a small margin no matter how popular or sought-after a stock is.
As an intraday trader, you may choose to bid a price slightly lower than the bid price and enter a sell order for a price slightly higher than the bid and thus have an excellent opportunity to buy and sell, making a little profit. However, the market works differently.
There is usually a gap between what day traders are willing to pay and what sellers are willing to accept that must be overcome.
Getting Carried Away By Emotions
Unfortunately, we human beings get carried away a lot by our emotions as we are emotional beings. Unfortunately, in the world of trading and the stock market, this human trait is not favorable because it leads day traders to make impulsive decisions that result in unsuccessful trades.
If stocks start to rise, intraday traders are more attracted to invest money in the market on impulse. And when the situation begins to turn unfavorable, the same human emotions drive us to withdraw the investment before things worsen. The main objective of business is to invest low and sell high, but unfortunately, feelings make you do the opposite.
Some highly experienced traders work for the big Wall Street firms, and their trades are consistently successful. Moreover, unlike small and independent traders who invest in intraday trading from home, experienced traders have access to various trading platforms.
This type of software allows them to know patterns and irregularities in stock prices more accurately than an individual day trader or an online broker can. But unfortunately, this leads to a considerable disadvantage that can impair decisions in buying and selling stocks.
Online trading is becoming more and more common as it becomes easier to do at home. Even obtaining a margin account or using a credit card is fairly accessible for most home traders who want to do stock trading.
It is important to consider that most intraday traders lose money. This makes this type of trading unsafe and makes profits with it almost impossible. Perhaps it can be compared to the thrill of gambling, but without a doubt, you run similar risks with one as with the other. The odds are against those who buy and sell stocks on the same day.
If you are thinking of entering the stock market, it is highly recommended to have an account with an online brokerage and have a buy and hold strategy. Intraday trading is best left to more experienced shareholders.