Let us first understand what day trading is before we delve into the risks that are involved with it.
What a day trader does is he restricts his investments to a day. This means that whatever he buys on
the day he sells on the same day. The philosophy is there is hardly any chance of a stocks hitting
rock bottom over the space of a day.
So even if there are losses, it will be marginal. Of course, the profits are also limited since
stocks get hardly the time to gain value in just a day. Of course there are exceptions when stocks
plummet or shoot-up in hours. But those are generally irregularities. It must be understood that day
trading is not something illegal or unethical.
Risk One
When someone invests on the stock market there is generally a hope for high returns. Day trading runs
counter to that philosophy. Of course you can make high profits even in day trading but for that you
will need huge capital where you can pump in money to buy rising stocks, and then sell them at the
end of the day when the stocks have gone higher. It is the number of stocks you buy that makes the
most difference and not the change in the price of the stock.
With a small capital you wouldn”t be able to make those kind of buys. What then happens is that you
tend to buy stocks of small-caps which involve a lot of risk. If you are buying only small-caps over
a long period of time then chances are you will be making losses. Most small-caps fail to show
profits and it would be difficult just to pick those ones that grow. You are bound to make mistakes.
Risk Two
Day traders discount the history and performance of a stock. When a day trader buys stock in a
particular company, he will try to buy the ones which have shown profit in the recent past. But it
might happen that on the day he bought the stock it showed a marginal decrease. There is every
promise for the stock to again gain momentum and go up.
But the day trader has to sell the stock cause as a day trader you cannot hold on to any stock at the
end of the day. So while you were almost certain of profit over a period of time, you end up making a
loss just because of the weird way day trading works.
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