Avoid Day Trading Your Dollars Down The Drain

Day traders quickly buy and sell stocks during the day, hoping their stocks will continue climbing or falling in value for the seconds to minutes they own the stock. This allows them to lock in quick profits. Day traders usually buy on borrowed money, hoping that they will reap higher profits through leverage.

Day trading, however, can be highly risky. Most individual investors don't have the wealth, time, or temperament to make money and sustain the devastating losses that day trading can bring.

Here are some of the facts that every investor should know:

- Be Prepared For Severe Financial Losses

Day traders typically suffer severe financial losses in their first months of trading. Many never graduate to profit-making status.

Given these outcomes, it's clear: you should only risk money you can afford to lose. Never use money you'll need for daily living expenses, retirement, or take out a second mortgage, or use your student loan money for day trading.

- Day Traders Don't "Invest"

They sit in front of computer screens and look for a stock that is either moving up or down in value. They want to ride the momentum of the stock and get out of the stock before it changes course. They don't know for certain how the stock will move, but they're hoping that it'll move in one direction, either up or down in value.

True day traders don't own any stocks overnight because of the extreme risk that prices will change radically from one day to the next, leading to large losses.

- Day Trading Is a Stressful and Expensive Full Time Job

You must watch the market continuously during the day at your computer. It's extremely difficult and demands great concentration to watch dozens of ticker quotes and price fluctuations to spot market trends.

You'll also have high expenses, paying your firms large amounts in commissions, for training and computers. You should know up front how much you need to make to cover expenses and break even.

- Day Traders Borrow Money Heavily Or Buy Stocks On Margin

Borrowing money to trade in stocks is always a risky business. Day trading strategies demand using the leverage of borrowed money to make profits.

This is why many day traders lose all their money and may end up in debt as well. You should understand how margin works, how much time you'll have to meet a margin call, and the potential for getting in over your head.

- Check Out Day Trading Firms With Your State Securities Regulator

Like all broker-dealers, day trading firms must register with the SEC and the states in which they do business. Confirm registration by calling your state securities regulator, and ask if the firm has a record of problems with regulators or their customers.

You can find the telephone number for your state securities regulator in the government section of your phone book, or by calling the North American Securities Administrators Association at (202) 737-0900. NASAA also provides this information on its website at http://www.nasaa.org/QuickLinks/ContactYourRegulator.cfm.

Just like anything else in life with potentially great rewards, there's risk involved with day trading. Just make sure you're in the right mindset and armed with sound information before you through yourself headfirst into buying and selling stocks.